As a real estate investor, you will often find sellers requiring proof of funds (POF) as a condition to either receiving a purchase contract or during a set time period while under contract. If you can’t show these funds as liquidity or available cash, you’ll typically be required to provide a letter from a financing partner (your lender) to show you have the necessary capital to proceed.
Proof of funds in the private/hard money sector take place as an Letter of Intent, or LOI.
Let’s discuss some of the finer points of an LOI.
A conditional finance letter
An LOI, if provided prior to underwriting, will give an idea of what financing will look like on the subject property. Some common items contained in an LOI are:
- Loan amount
- Interest Rate
- Origination points
- Processing and other fees
The big takeaway here is that this letter is subject to underwriting, which leads us to our next point.
The loan rate and term can change
One of the most common misconceptions about an letter of intent, is that it is a binding agreement on loan amount, rate, points, etc. LOIs are typically subject to underwriting and can reflect a best case scenario. If you are shopping around, lenders can provide a blanket letter to show what their best rates and terms are, but it may not fit you or your property. This means that the offer can change after being processed through underwriting.
Items that can affect a loan term and rate include, but are not limited to:
- FICO score
- Personal Experience
- Property Location
- Property Appraisal
- Personal Liquidity
It is not a binding agreement to financing
Just like our previous point, the LOI is meant to be a conditional letter and it is not a firm contract for financing. While it’s not common for a lender to pull out of a deal after a letter is issued, problems in underwriting can cause an offer to be retracted.
Some of the reasons for a lender denying funding include problems with title, the borrower does not have enough capital to proceed with the deal, or information was falsified on the application.
You’ll still need to show your proof of funds
While a finance letter shows funds provided for an acquisition, it is commonly only a portion of the necessary funds to make the purchase.
If the lender is providing 90% of the acquisition, sellers or agents may require you to show bank statements or liquidity available of the additional 10% needed at closing, as well as the fees listed on the LOI. It is a good idea to have either updated bank statements available or a verifiable letter from your bank stating available funds.