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Understanding the Difference Between Proof of Funds and Proof of Deposit

The primary difference between proof of funds and proof of deposit is that the former verifies an account contains the requisite funds for a particular purchase, while the latter ensures those funds arrived from a legitimate and legal source.

Mortgage applications will usually require both proof of funds and proof of deposit letters before the application is accepted. As mortgages are the most frequent transaction that require both these, it is worth understanding how you can ensure you have both the funds and the proof of deposit to ensure a smooth mortgage application process.

Proof of Funds Explained

A proof of funds letter confirms that an entity, whether an individual or company, has the funds available to pay for a specific transaction. It will usually take the form of a bank statement, although other forms can sometimes include a security or custody statement. The proof of funds document demonstrates to the vendor that the buyer has the money ready and available to perform the proposed transaction. It ensures that the buyer not only has the money they need for the purchase, but that the eventual payment of those funds will come from a verifiable source such as a bank. In most instances, proof of funds must refer to liquid capital, or a cash amount. This is a crucial element to understand, because investments like life insurance and retirement or mutual fund accounts do not qualify as legitimate proof of funds.

Proof of Deposit Explained

The proof of deposit letter verifies that the requisite funds for a large purchase or down payment have been deposited into an account and where those funds come from. As with proof of funds, this document is commonly required when someone is applying for a mortgage to buy a house. 

Proof of deposit allows a mortgage lender to see that the borrower has legally acquired the necessary money to pay the down payment on the house being bought. The document also enables the lender to see if the deposited amount is from such a source that demonstrates the borrower will be able to continue paying the mortgage. For example, one-off gift payments or funds acquired through other loans could be a red flag as they are not considered reliable or regular payments in the eyes of a lender. Mortgage companies require borrowers to be able to consistently pay down the loan and not just front the cash for the initial down payment. Thus, the proof of deposit demonstrates the reliability of the borrower’s income before approving the mortgage.

Proof of deposit letters also verify that the amount of a check being deposited matches that of the account being debited. The amount written on the check will be compared with the amount on the proof of deposit (PoD) to ensure the check is good.

How to Request PoF and PoD Letters

Both a proof of funds letter and a proof of deposit letter can be requested from your bank. The bank where you have your main checking or savings account will be the best option as they can easily verify the cash you have available.

A bank typically takes 24 to 48 hours to process a request and produce the document, although it can take longer. Ideally you should request the letter at least a week in advance of the date that you need it by.

Securing Funds for PoF and PoD

Before requesting a proof of funds letter or proof of deposit letter, you will of course need to ensure you have the funds available in your account. For business owners, the best way of achieving this is to set up direct debits and recurring payments with your customers so the source of the money is clearly identifiable to lenders or relevant selling parties.

We Can Help

Find out how GoCardless can help you with ad hoc payments or recurring payments to guarantee your proof of funds is ready to go and your proof of deposit demonstrates the legitimate source of your liquid capital.

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