One of the main steps towards purchasing an investment property is securing a hard money Proof of Funds letter. To be a successful real estate investor, you need to understand what a hard money Proof of Funds letter is, what it isn’t, and how to effectively leverage it to get the best price on your next real estate investment.
What is a Hard Money Proof of Funds Letter?
A hard money Proof of Funds letter is a letter issued by a hard money lender informing sellers and their agents that its client is pre-approved to purchase a property within a certain price range. In many aspects, it works similarly to the proof of funds letters issued by conventional lenders you might be familiar with.
If you ever bought a primary residence, chances are you’ve worked with a conventional mortgage company. Before you’ve started searching for a home, that mortgage company “pre-approved” you for a loan. They’ve looked at the factors that are important for their underwriting and determined the maximum loan amount you can safely afford. The pre-approval process culminated in issuing a proof of funds letter. The main purpose of the proof of funds letter is to inform other parties that you are a serious buyer worth their while. Your real estate agent then submitted that letter to the sellers of the home you wanted to buy. Sellers naturally want to make sure that potential buyers have funds to purchase their home. A Proof of Funds letter offers the assurance that they can.
When to use Hard Money Proof of Funds letters?
A Hard Money Proof of Funds letter tells the world that you’re pre-approved for financing drastically different from a regular loan. It sends a message that your funding is not contingent on property inspections or complex underwriting. An effective hard money Proof of Funds letter states that the borrower’s offer is equivalent to cash.
There are at least three reasons to use hard money proof of funds letters to snatch the right property:
The most compelling reason to use a hard money proof of funds letter is when you see disclosures such as “handyman special”, “cash-only”, or “sold as-is.” These are the code words indicating that a property doesn’t qualify for conventional financing due to its condition.
Another reason to use a proof of funds letter from a hard money lender is when the real estate investor does not qualify for other types of financing. For example, her score might be too low or she might not declare her full income.
In some cases, the seller must sell the property super quickly. A buyer who can close within days would naturally be at advantage.
How to get a Hard Money Proof of Funds Letter?
As a hard money lender, we underwrite our loans based on several major criteria. One of such criteria is the strength of the borrowers. It includes many factors such as borrowers’ previous investment experience, credit history, and their overall financial stability. All these factors influence the decision to whether pre-approve borrowers for funding or not. With some exceptions, the maximum purchase price stated on your proof of funds letter is primarily driven by the amount of your own capital you’re willing to commit.
The first step in getting a Proof of Funds letter is to talk to our underwriters and fill out the detailed loan application. This application provides us with a better understanding of your profile. Our pre-approvals typically take twenty-four hours or less. To better understand how we underwrite our loans, you can read our previous blog on this topic.
Recently, we have been receiving a number of phone calls with requests for instant POF’s – no promise of funding is needed. Those requests come from wholesalers looking to put a property under contract and then assign it to another buyer. They also come borrowers with a unique but time-sensitive opportunty to purchase a distressed home. “I need it now. Can we get pre-qualified later?” they ask.
The first group of folks should know that no reputable lender would be issuing proof of funds letters they do not intend to fund. To the second group, we say that the lack of planning on their behalf should not constitute an emergency on our behalf. Our pre-qualification process is quick and simple, but to skip it completely would be unfair to many other people involved in the transaction, especially to the sellers. To avoid getting yourself in the bind, plan in advance. Interview several private lenders and get pre-qualified with the one you are most comfortable with. Then start shopping for properties to flip.
Hard Money Proof of Funds Letter – What It Is Not
A Proof of Funds letter is based on your strength as a borrower. However, there are other major criteria that play an important role. Hard money lenders are asset-based lenders. As such, their decision whether to fund a certain transaction is heavily focused on the collateral itself. What is the after-repair value of the home? Does this fix-and-flip make sense? How much in profit does the borrower expect to make? These are some of the questions that a private lender might ask. You might be as strong as any borrower, but if a specific deal doesn’t make sense, a lender might be hesitant to extend the financing.
Hard Money Proof of Funds is not a commitment to fund a loan.
That means that a hard money proof of funds is not a commitment to fund a loan. You should not confuse it with a Letter of Intent. A Letter of Intent is a commitment to fund a loan, on specific terms, and secure it against a specific property once all underwriting conditions are met. In contrast, a hard money proof of funds sets your budget when shopping for an investment property. Your next step is to find an investment property that allows you to make money.
Of course, you can only conduct such analysis after you identify a property you’re interested in. To evaluate its potential, you will need to know the rehab costs and its after-repair value. At New Funding Resources, our underwriters work alongside our borrowers to evaluate each transaction. Regardless of the strength of the borrower, some rehabs just don’t make sense. In contrast, others offer a healthy profit margin. A hard money loan calculator might offer practical assistance in evaluating a potential transaction.
Hard money proof of funds cannot be used in consumer lending.
Hard money lending should not be confused with subprime lending. Subprime lending is a type of lending that is specifically designed for high-risk borrowers. While private lenders accommodate borrowers with lower scores or no-verifiable income, they work exclusively with real estate investors. All their loans are for business purposes only.
How to Better Leverage a Hard Money Proof of Funds Letter
Make It Clear You Are Not Working with a Conventional Lender & Not Using a $203K FHA Loan
In real estate investing cash rules. Unless you are willing to pay a premium, it’s hard to compete with cash offers. Private loans, however, offer the next best thing. Make sure that your Proof of Funds letter clearly states that you are working with a hard money lender and not a regular mortgage company. For example, our hard money proof of funds letters point out specifically that our borrowers’ offers are equivalent to cash.
Provide Customized Letters Reflecting Your Maximum Price
As an old saying goes, in real estate you make your money when you buy. You might be pre-approved for $200K, but why disclose it if your maximum offer is $180K? Your hard money lender must be willing to customize their proof of funds letters to help you get your next property at the lowest possible price.
Keep Your Hard Money Proof of Funds Letter Current
Many hard money lenders come with expiration dates. For example, our hard money letters expire after 90 days. Let’s be realistic. In today’s competitive real estate market, it might take you longer than three months to find a property. So make a mental note to call your private lender and ask them to update it. Unless your circumstances have changed dramatically, it should not be an issue.