How do I get a proof of funds letter from my hard money lender?

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Question

How do I get a proof of funds letter from my hard money lender?

Post overview

1. What is a proof of funds letter?
2. Does every hard money lender provide a proof of funds?
3. Information needed for a proof of funds letter
4. How to request a proof of funds letter
5. How is a proof of funds letter different from a term sheet?
6. Conclusion

What is a proof of funds letter?

A proof of funds letter is a document that a buyer/real estate investor can show a property seller to indicate that he or she has the financial means to move forward with the purchase of the subject property. Sometimes, a seller will want to confirm that the buyer has the wherewithal to actually purchase the property, and will be able to close on the deal. When a buyer doesn’t have the requisite liquidity or financing to actually close on the deal, time is wasted on both ends.

A proof of funds can take a few different forms, but broadly speaking it shows that a lender has looked at the financial data a prospective borrower has submitted, and based on that data, the lender has pre-approved the borrower for a certain loan or line of credit amount.

The proof of funds letter will often include; the name of the entity or person purchasing the subject property, the amount of financing the purchaser (borrower) has been approved for, and the status of the borrower’s approval.

Does every hard money lender provide a proof of funds?

Not every hard money lender will provide a proof of funds. As such, if you know that you will need a proof of funds after you’ve talked with the seller, then you can ask the hard money lender you’re speaking with to see if they are willing to provide a proof of funds.

Information needed for a proof of funds letter

There are a few key items that comprise a proof of funds letter;

1. The borrower’s name
2. The borrower’s liquidity
3. The borrower’s approval status

As such, this data will need to be provided, and in the case of liquidity, calculated, in order for the proof of funds to be generated.

Let’s go over each of these sections in depth.

1. The borrower’s name

There are typically two parts to the borrower’s name, the borrower’s actual name and the name of the entity that is borrowing.

Most of the time, when real estate investors are working with hard money lenders, they will borrow money through an entity; the loan that a hard money lender makes is a commercial, business-use loan. Sometimes, hard money lenders will make loans to individuals without an entity, but this is less common.

As such, it’s important that the hard money lender knows the name of the entity the loan will be made to. Sometimes, real estate investors do not yet have an entity set up, so the name of the entity is “TBD” or “To Be Determined”. 

2. The borrower’s liquidity

The liquidity information that you provide the hard money lender gets translated into their loan pre-approval amount based on underwriting criteria. Hard money lenders count various items as “liquid”, and they can differ on a lender to lender basis. Additionally, hard money lenders often mark down some forms of liquidity to account for the risk of the asset.

Below are some sample items that hard money lenders count towards liquidity,

1. Cash in bank accounts (checking/savings accounts)
2. Stocks, bonds, and other securities
3. Retirement funds
4. Life insurance cash surrender value
5. Cash-out availability on lines of credit

To provide a concrete example, let’s take a look at the following data, and then translate it into a pre approval amount,

Cash in checking accounts: $120,000

Stocks: $300,000

Retirement funds: $500,000

Below is a table showing how a hard money lender might interpret the above values.

Now, how might this translate into a proof of funds?

Let’s sum the HML values,

$120,000 + $150,000 + $250,000 = $520,000

Then, let’s apply a multiple to liquidity based on a sample hard money lender underwriting guideline,

$520,000 * 3 = $1,560,000

Based on the above data and our sample hard money lender guidelines, your pre-approval amount would be $1,560,000. This is the number that will be shown on the proof of funds.

3. The borrower’s approval status

Your approval status will vary based on how much information you have given the lender, and how far along you are in the loan process. Generally speaking, when you are looking to obtain a proof of funds, you are early on in the loan process. As such, your approval status is very likely to be “preliminary”, or “pre-approved”. At this point, you have likely filled out a preliminary application, and the lender has received some basics about your personal financials as well as the subject property.

This pre-approval status indicates the lender has taken a look at the high-level information you have given them, and based on that information, they have determined what they might be able to offer you. To some sellers, this is significant, as it shows that you have taken the time to engage a hard money lender, and are serious about obtaining financing.

From the lender’s point of view, they are still protected because they have not, at least at this stage, granted a full approval. Granting a full approval would increase the burden on the lender to perform, which is why a full approval often does not happen until after the property is appraised, and underwriting has spent a significant amount of time with a file evaluating both your personal financials and the subject property.

How to request a proof of funds letter

If you want a proof of funds letter, you can contact the hard money lender you have engaged. If you haven’t filled out their preliminary application, they will likely request that you do so before providing you with a proof of funds. The reason for this is the lender needs the information mentioned above in order to generate the proof of funds.

After you submit a preliminary application, it’s common to get an account executive, or someone who manages your account, assigned to you. You can reach out to this person and ask them for a proof of funds.

How is a proof of funds letter different from a term sheet?

A proof of funds is a preliminary document based on limited, unverified data that you submit to the lender. The proof of funds is a way for you to show a prospective seller that you are a credible buyer, but it does not promise that a lender will make a loan.

A term sheet lays out the terms for the loan. Often, a term sheet will include the interest rate, term length, origination points, and other fees associated with the loan. Typically, term sheets are generated further along in the loan process and demonstrate that a lender is serious about making a loan.

Conclusion

In sum, a proof of funds letter is a document that can be used to show a prospective seller that you are a credible buyer and contains the following three elements;

1. The borrower’s name
2. The borrower’s approval amount
3. The borrower’s approval status

A proof of funds is not provided by every hard money lender, so you will need to figure out whether or not the hard money lender you are speaking with can handle such a request. 

Do you need a proof of funds letter for your project?

If so, please fill out our preliminary application at this link to get started on your proof of funds request today.