As a hard-money lender in Los Angeles, I often hear the terms “proof of funds letter” and “pre-approval letter” used fluidly by sellers, mortgage brokers and investors. These documents are very different and serve divergent purposes. A pre-approval letter does not establish proof of funds, and a proof of funds letter does not evidence preliminary loan approval.
The focus of this blog is to explain the important differences between these documents from the viewpoint of a hard-money lender.
The Pre-Approval Letter
An investor may be required to provide a pre-approval letter to the seller and the mortgage broker. This letter establishes a degree of certainty that a lender is willing to lend a certain amount toward the purchase of an investment property after its review of a preliminary loan package and cursory underwriting.
A pre-approval letter does notguarantee that the loan will be funded, nor does it represent that the underwriting process is complete.
The Proof of Funds Letter
By providing a proof of funds letter to a seller and a mortgage broker, the investor is proving the cash available for the transaction. Although this letter may not be a requirement, it is good practice for an investor to provide the proof of funds along with an offer. This letter establishes the legitimacy of the offer and adds to the credibility of the buyer.
The proof of funds letter creates a serious offer. This is an important strategy in a seller’s market.
The Issuer of a Proof of Funds Letter
A proof of funds letter can be issued by a traditional bank or by a hard-money lender.
If an investor has an established relationship with a depository bank, a sufficient amount of funds is on deposit and a good credit history, then the bank can provide a proof of funds letter. The issuing of this letter does not identify the bank as the potential lender. The acquiring of an investment property with a value-add objective will not be a fit for the loan programs offered by a bank.However, a bank can attest to the proof of funds on deposit.
Some investors provide account statements as the proof of funds. While the same purpose will be served, this practice is not recommended.
A hard-money lender in Los Angeles will provide a proof of funds letter when ready to make a loan offer. Since hard-money lenders do not offer depository services, an investor must provide a preliminary loan package, financial information and information on the borrowing entity and the partners comprising it.
Proof of Funds Qualifications
For a hard-money lender to issue a proof of funds letter, the following information will need to be made a part of the preliminary loan package:
- account statements for money market and deposit accounts;
- financial statements; and/or
- proof of an open line of credit.
This information is necessary for the investor and for all partners signing on behalf of the borrower entity and as guarantors.
The Opportune Time for Proof of Funds Letter
The opportune time to request a proof of funds letter is prior to submitting an offer. The best scenario is to have a written offer accompanied by this letter. To lay the groundwork for this scenario, the letter will need to be issued by the depository bank holding the accounts. The bank should be able to issue a proof of funds letter within 1-3 business days after the request.
The best route for the investor is to have the letter issued by the depository bank for presentation to a seller, a mortgage broker and a hard-money lender.
This process will save time, establish validity oftheoffer, and willbegin the process of loan approval.
Sellers, brokers, and real estate investors need to keep in mind that a pre-approval letter speaks to the preliminary actions of a lender without reference to the proof of funds. A proof of funds letter speaks to the liquidity of an investor without reference to the merits of the deal. Both letters are important in bringing the sale and the loan to closing, but very different purposes are served.
Ready to Take Action? Contact PB Financial Group Today
If you are a real estate investor with questions regarding either a proof of funds letter or a pre-approval letter, then you need to work with a reputable and respected hard-money lender in Los Angeles. PB Financial Group is a premier, direct hard money and bridge lender who has been providing quick funding since 2006, and who has funded over 2,700 loans. Our objective is to satisfy your financing needs on important real estate projects throughout California in an efficient manner.
To learn more about how to successfully finance your next value-add investment, please contact PB Financial Group at 877.770.3707 to schedule a consultation or visit www.CalHardMoney.com to learn more.
PB Financial NMLS #357614/DRE #01522495