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The concept of “certified funds” is straightforward: for a small fee, you can get funds certified, normally through a bank, which then issues a “certified check” that you can then pay to someone else. Your bank’s certification ensures that the approved check or similar “certified” document will be honored or cashed. However, as with many things in life, while the concept is easy, the implementation isn’t always. Certified checks and bank letters of certification are the two most common types of funds certification. Both are vulnerable to deception.
Before we move any further, let’s get a grasp of what these terms really mean. This begins with definitions and how these types of funds work. Plus a brief look at some examples.
What Are Certified Funds and How Do They Work?
A certified check, which serves as a tool to guarantee payments, is the most popular example of certified funds. Say, for instance, you decide to buy a used car from a private party in a neighboring state. You might withdraw the funds from your bank and pay the buyer in cash, but traveling with a large sum of money is dangerous. On the other hand, you might write the buyer a personal check. However, the buyer is unlikely to let you drive away with the car until the check clears.
The workaround – at least in principle – is to pay the customer with a certified check, which ensures that the check will be cashed by the bank that issued it. This works like this: you go to your bank’s nearest branch (this is one of those cases where doing it in person is possibly easier and less aggravating). You inform the teller that you need a certified check for the specified amount. The teller checks to see if you have enough money in your account to cover it then gives you a certified check to sign in front of the teller. The check normally goes to a third party, in this case, the person who sold you the vehicle. The bank places a hold on your account in the sum of the certified check as part of the process. The bank lifts the hold is after cashing the check.
Letters of Certification
A letter of certification from your bank promising the payment is another popular type of funds certification that is rampant in real estate closings. The medium is different, but the message is the same. Basically, the bank issuing the letter will pay the presenting party (a real estate buyer, for example) the sum guaranteed in the letter upon reasonable demand. When the bank issues a letter certifying funds, it also places a hold on your account for the amount in question.
Both a certified check and a cashier’s check, in theory, offer certified funds. The only difference between the two is who signs the checks. While you are responsible for signing certified checks, the bank is responsible for a cashier’s check. Both are, theoretically, equally permissible.
Certified Funds Examples
The most basic forms of Certified funds include the following;
- Certified Check
- Cashier’s Check
- Money Order
- EBT wire transfer (i.e. Western Union)
Certified checks are so-called because they come with a promise from the payer’s bank that funds will be available when the check is cashed. These checks, unlike ordinary personal checks, need approval from both the payer and the bank in the same transaction. As a result, there is an extra layer of security for receivers. The bank signature serves as a guarantee from a third party that funds are currently available. This means that it’s almost impossible for these checks to bounce.
However, if funds are not available or the bank rejects the check, recipients can file a lawsuit against both the payer and the underlying bank. in cases such as this, both parties are responsible for nonpayment. But there are exceptions.
In cases of forgery or if the check has been outstanding for longer than a set amount of time on the check, the bank is at liberty to decline such certified checks. They are not under any obligation to honor these checks.
Cashier’s checks are similar to certified checks in that they provide more security for recipients by excluding the payer from the equation almost completely. Payers must request cashier’s checks directly from their banks, which must accept the checks as a promise that the checks will be redeemed from the banks’ own funds rather than the payer’s account. When you purchase a cashier’s check, banks deduct the funds from the payer’s account before honoring the check with cash from their own reserves. This makes it a viable example of certified funds.
Money orders provide greater security to both senders and receivers than certified checks or cashier’s checks. A money order is similar to a short-term certificate of temporary deposit. This means that the payer gives a financial institution a certain sum of cash, and the financial institution issues a money order that is redeemed with the cash issued. Money orders are available from a broader variety of retailers than other payment methods, including some gas stations and grocery stores.
What Could Go Wrong in This Situation?
Earlier knowledge articles often stressed the difference between a certified check and a cashier’s check, stating that a cashier’s check signed by the bank is more trustworthy than a certified check signed by the issuing bank’s client.
However, in the modern information age, they’re both equally trustworthy – which means they’re both equally untrustworthy. Anyone with a digital printer and Photoshop skills can counterfeit a cashier’s check, a money order, a letter of approval, or a certified check. Thanks to the democratization of digital printing.
A qualified professional would be fooled by few daily examples of such fake documents, but there are two issues with that assurance: Unless the forged document is worth a lot of money, it will most likely be handled by a bank teller who has no special training and will accept the document and deposit the money into the customer’s account. The check is then held at the bank until the end of the banking day, after which it is sent overnight to the issuing bank for processing, or its entirely digital counterpart. If the check is returned unpaid because there are insufficient funds, the receiving bank notifies the issuing bank that the check is uncollectible.
If the check is forged, the forger will be long gone by the time you realise it’s being returned and the money debited back to your account.
Certified document forgery isn’t uncommon, either. According to an Association of Finance Professionals survey, 75 percent of reporting U.S. banks experienced check fraud in 2016, and the number continues to rise year after year.
Fortunately, there is a simple solution: wire transfers do the same thing – send certified funds from your account to a recipient account – for the same price or slightly more. The method is identical from your perspective, except that you can complete the entire transaction online. Basically, y ou specify the amount you want to wire, as well as the recipient’s name, address, and account information, which typically includes the branch number, institution number, and address. For same-day transactions, the standard fee is $25.
In the face of widespread check fraud, some states, including Ohio, are enacting legislation that requires wire transfers and prohibits certification guarantees in all real estate transactions. Producing a fake certified check used to be difficult, but in the age of Photoshop, it’s a piece of cake!
What are the benefits of Certified Funds in Real Estate Transactions?
Certified funds are needed because they guarantee that the funds are good, legitimate, and present at the transaction’s conclusion. A closing date is set, and if the seller presents a personal check, the title company will have to wait at least a week before releasing the sale proceeds to the seller. If the seller does not collect his earnings for a week after the agreed-upon closing date, the parties haven’t really closed, right? Your closing agent would need certified funds in order to disburse proceeds to the seller, commissions to agents, filing fees, and other expenses. Certified funds provide assurance to the closing agent that she is keeping real funds and is authorized to disburse funds to the various parties entitled.
When you’re ready to close on a home, you’ll either use your own money, borrow money, or do a mix of the two. If you borrow the money, your banker would most likely issue you a cashier’s check to send to the title company or simply wire the money to you. You may need to submit a “cashier’s check” or a “bank money order” if you are responsible for a portion of the funds. Depending on your bank, you can use either concept. Purchasing or selling real estate is a significant investment that can be stressful.