Proof of Funds for a Mortgage

If you’re trying to take advantage of the current prime rate to buy a house, you’ll first need to make sure you have the money for the required down payment. This typically means getting the bank where you keep your accounts to draft a letter stating that you have the funds. To demonstrate proof of funds, you’ll need to be able to hand over bank statements and a letter from your financial institution certifying the money is in the account.

Before a lender will commit to issuing hundreds of thousands of dollars to you for a home, that lender is understandably going to want to make sure you can hold up your end of the deal. Both the lender and the seller have a vested interest in this information, although you likely won’t want everyone digging through your bank statements. For this reason, you can satisfy the need to show that you have the funds through a proof of funds letter, issued by the lending institution where you bank.

In order to buy a house, you’ll need proof of funds for closing costs and your down payment. Most lenders will also require you to have a certain amount of cash reserves that you can call on if you ever suffer tough financial times. Even if you’ve been preapproved for the mortgage, you’ll still need to be able to provide documentation before the loan can go through.

Before you apply, you should verify that you can show the proof of funds mortgage companies require. The biggest expense you’ll have is a down payment, but the amount varies depending on the type of mortgage you’re requesting and your creditworthiness. For a Federal Housing Administration loan, you can often get away with a down payment as low as 3.5 percent of a home’s purchase price, while conventional loans will usually require between 5 and 20 percent down.

You should also plan to provide proof of funds for closing costs. You can use an online calculator to get a more accurate estimate for your situation, but generally closing costs will be between 2 to 5 percent of the home’s price. One survey found that homebuyers pay around $3,700 in closing costs on average.

As for cash reserves, you’ll usually find that lenders require two months in savings to lock in the current prime rate for a mortgage. That means after you’ve paid closing costs and handed over your down payment, you’ll need to have enough leftover to fully cover your mortgage payment for two months. The funds can’t be tied up in a nonaccessible source, which means they’ll need to be in savings, a checking account or a money market fund.

When you’re asked to provide proof of funds for closing costs, your down payment and cash reserves, you’ll naturally want to know what counts. Lenders don’t accept just any type of funding as an acceptable source. If you want to lock in the current prime rate on a mortgage, the following sources of funding are acceptable:

• Money in checking or savings
• Stocks and mutual funds
• Retirement funds
• Gifts from loved ones

When asking for proof of funds, mortgage companies will typically accept bank statements. You can also provide verification in the form of a financial statement from your broker or a letter from a certified accountant. It’s important to note that some lenders require the money to be seasoned, which means it’s been in your account for a minimum time period. This can vary from one lender to another, but 60 days is a good guideline to follow.

The seller may want verification of available funds, in addition to proof that a lender has agreed to loan you the rest of the money. When that happens, you’ll need a proof of funds letter, drafted on bank letterhead with an official signature.