What is proof of funds?
Proof of funds, in property transactions, is a document or documents demonstrating that a would-be buyer has the means to afford the purchase. They may vary based on how the buyer intends to finance their acquisition.
This evidence might be:
- A bank account statement showing the available amount.
- A mortgage agreement, or a letter from a mortgage lender.
- Deed of gift proving the money has been gifted to you.
- Proof of your property sale, if that is your source of funds.
- An executor's letter confirming an inheritance.
- Pension statements.
- Dividend certificates.
- Proof of international transactions for foreign buyers.
- Documentation providing a source of funds for cash buyers.
This article is one in a series about the costs of buying a new home and other financial considerations. The previous article gave tips to work out whether a property is overpriced.
Stages in property transactions where proof of funds is required
Proof of funds tends to be requested at two primary junctures of the purchase process.
At the outset, an estate agent might ask for it to ensure the prospective buyer is not only earnest but also financially prepared for the transaction.
Later, as contracts are exchanged, the solicitor representing the seller could ask for proof to ascertain that the buyer can meet the agreed price. The type of evidence needed might change according to the source of the funds.
Why estate agents ask for proof of funds for buying a house
Viability of purchase
Agents act on behalf of their client, the seller. They will want to make sure that any offerer has sufficient funds to buy a property before they recommend that a seller accepts an offer.
Regulatory requirements
Introduced in January 2020, the Fifth Money Laundering Directive (5MLD) imposed tighter controls on high-risk transactions and expanded the definition of 'obliged entities'. The directive amplified the responsibility of estate agents to validate their clients' funds.
Post-Brexit, this law still applies in the UK.
In line with this legislation, estate agents need to conduct 'due diligence' on their clients. Meaning they are bound by law to make sure of their clients' identity and the legitimacy of their funds under the anti money laundering legislation.
These measures aim to verify that the funds being used in the property transaction are not the proceeds of any illicit activities. To corroborate this, agents might request bank account statements, mortgage agreements, or further bank statements.
Estate agents carry the burden of keeping the property sector safe from organised criminals with the intentions to launder money. They must affirm the proof of funds presented by the buyer and assess their source. Any dubious activities should be reported, thereby underscoring the responsibility of the estate agents to uphold the integrity of the property market.
Source of funds in property purchases
Proof of funds carries a sibling requirement: demonstrating the source of these funds. Myriad money sources exist, each with its distinct set of acceptable proofs.
Different sources of funds and their proof
Savings, property sales, gifts
A time-tested approach to accumulating funds for a property purchase is through savings. If this is your path, your bank account statement should show your savings over time.
Likewise, if you've recently sold a property, your solicitor's completion statement for the sale will suffice.
For those fortunate to receive a generous gift, you'll need a bank statement showing the transfer alongside a letter, known as a 'deed of gift' confirming the gift from the benefactor and stating it doesn't need to be repaid.
Inheritance, pension release, dividends: proving sources with appropriate documents
Have you been bequeathed a windfall? In that case, the executor's letter confirming your inheritance amount will do the trick.
Pension savers may use their pension statements as proof.
Those with a hefty dividend cheque can provide a share release schedule or a dividend certificate.
Compensation awards, cash, international funds
If your funds stem from a compensation settlement, a letter from the lawyer or an agency confirming the award will meet the mark.
Meanwhile, cash funds, though rare due to anti money laundering legislation, may require further bank statements or evidence proving where the money was obtained.
For overseas buyers, bank statements displaying international transactions are necessary, though the path may be trickier if the funds are from a high risk country.
Distinguishing requirements for mortgage and cash buyers
Estate agents and seller's solicitors base their expectations on whether you're buying with a mortgage or as a cash buyer.
The documents they request may differ, but the goal remains the same: provide proof of funds and their source.
As a prospective homeowner with a mortgage, you'll need to demonstrate two things: your deposit amount, usually via a bank statement, and a mortgage agreement in principle, highlighting the loan amount your mortgage lender is willing to provide.
For the rarer breed of cash buyers, your bank statement showing all the funds required to purchase the property in your account is your ticket.
While being a cash buyer may often speed up the process, be mindful that large sums of cash can raise eyebrows under anti money laundering regulations and may necessitate more thorough checks.
Depending on the nature of your funds, an estate agent might ask for various additional documents.
Consequences of failing to provide adequate proof of funds
Non-compliance with requests for proof of funds can have significant consequences. These range from delays in property purchases to potential legal implications.
Estate agents and the seller's solicitor may refuse to progress with the sale until you provide proof of funds. If you can't substantiate your financial position, your dream property could slip through your fingers.
Moreover, the seller might view you as less of a serious buyer if you fail to provide proof swiftly and effectively. This could potentially lead to the seller accepting another offer.
Failing to provide adequate proof of funds isn't merely a stumbling block in your property journey. It's also a potential red flag in terms of anti money laundering regulations.
If suspicions are raised about your funds' legitimacy, this could trigger a thorough investigation. In extreme cases, if evidence of criminal activity is found, you could face legal repercussions.
Best practices for showing proof of funds
With appropriate preparation and cooperation, you can establish your credibility and become a sought-after buyer.
Preparation: collect bank statements in advance
A well-prepared buyer should have a complete set of documents showing their funds' source and amount.
The advantage of this approach? It avoids a last-minute scramble to gather the necessary paperwork when the estate agent asks for proof.
Make sure to have updated bank statements showing not just your savings, but also any regular income or deposits that contribute to the purchase price.
If you're a cash buyer, you'll need to provide substantial evidence of the money in your bank account. Bear in mind that proof of large sums can require more than a single statement.
Cooperation: working with your conveyancing team to provide the required evidence
Your conveyancer can help you understand what documents you need to show as proof and how to obtain them. They can also advise on how to handle funds from a high risk country or if your money source is considered higher risk.
For instance, gambling winnings or money derived from a dividend certificate may require evidence confirming their legitimacy. Also, if you're receiving help from a family member, they can guide you on obtaining a 'deed of gift' confirming the gift and the source of those funds.
Remember, some funds, especially cash or those that cannot be shown not to be linked to criminal activity, may not be accepted by estate agents or solicitors. If you're in doubt, your conveyancer will guide you on the best course of action.
At the end of the day, it's all about maintaining transparency with your conveyancing team and understanding the importance of the legal requirement to provide proof of funds. We have a more detailed piece, where you can learn more about the conveyancing process and how to choose a good conveyancer.
The earlier you gather all the funds and the evidence, the smoother your path to owning your new property.