What is a proof of funds letter and how do I get one?

If you're looking to buy a house, you'll have to provide a lot of documentation — including a proof of funds (POF) letter. In most cases, this document shows the seller that a prospective buyer has enough ready cash to cover purchase costs outside the mortgage, like the down payment and closing costs.

Here's what you need to know about proof of funds letters, including what qualifies, how to get one and how they differ from preapproval letters.

• What is proof of funds?
• What qualifies as a proof of funds letter?
• How do homebuyers acquire a proof of funds letter?
• Proof of funds vs preapproval
• Bottom line

Proof of funds is simply documentation that demonstrates how much cash, or liquid assets, an individual or entity has available.

If you're paying cash for a home, a proof of funds letter indicates you have the money to cover the full cost of the property. If you're taking out a mortgage, it's typically used to demonstrate you have the assets to cover the escrow, down payment and closing costs.

If you're shopping for a mortgage, CNBC Select recommends Rocket Mortgage, which accepts applicants with credit scores as low as 580. And if you have a score of at least 620, there are 15-year and 30-year fixed-rate options with a down payment as low as 3%.

You may not need a proof of funds letter in some cases, especially if the house is being sold directly by the owner.

In some cases, printed bank statements and other account balances are adequate. In other situations, a formal letter from your financial institution that details the exact amount of available funds is required.

Those assets must be liquid — bonds, life insurance policies and other assets that are not readily available don't count toward a proof of funds.

Getting a proof of funds letter is relatively easy, though the process varies depending on whether you're using statements or an official letter from your bank.

Consolidate your money

You may need to move funds from multiple accounts into one place so you can just present one POF letter that clearly shows the full amount of your liquid assets.

Request a POF letter from your bank

Ask the financial institution holding your assets for a proof of funds letter. Some banks have an online form to fill out while others may require you to come into a branch. Either way, it usually takes no more than a week to receive the letter.

Protect the letter

As with all financial documents, it's important to keep your proof of funds letter secure since it can contain sensitive information like account numbers and balances and your physical address. Only present a POF letter to someone involved in the home sale and keep a copy in a safe deposit box or other secure location.

While it's common during the homebuying process to need both a proof of funds letter and a preapproval letter, they serve different purposes.

A proof of funds letter lets the seller know you have ready cash to cover purchase costs like the down payment and closing costs. A preapproval or prequalification letter confirms that a lender has tentatively agreed to loan you a specific amount. It's not a guaranteed offer, but it lets the seller know you are likely to get financing.

Proof of funds demonstrates an individual or entity has the liquid assets to cover a specific expenditure. When buying a home, that typically means enough to pay for the down payment and closing costs.

If you're submitting an offer on a house, a proof of funds letter can give you a leg up over another potential buyer with less cash on hand.

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