A wet loan is a mortgage arrangement in which funds are disbursed at the time of — or in conjunction with — the completion of a loan application. Other required documentation for closing the property, such as surveys and title searches, is completed after the funds are released.
Wet loans enable the borrower to purchase property more rapidly and complete the necessary documentation post-transaction. This practice varies based on state laws, and not all states permit wet loans.
The Core of Wet Loans
In a wet-funded mortgage, the borrower receives money upon approval of their loan. They can then purchase property and complete other required documentation to officially transfer the property title. After the funds are transferred, the bank reviews the loan documentation. Wet loans accelerate the buying process by facilitating sales before paperwork completion.
Wet Loans vs. Dry Loans
With wet loans, the rapid pace comes with increased risks, including a higher likelihood of fraud and loan default. The risk stems from funds being released before loan documentation is thoroughly reviewed and approved. If the bank later determines that a loan is too risky, it faces substantial costs and effort in revoking the mortgage.
Conversely, a dry loan only disburses funds after the completion and review of all required sale and loan documentation. Dry funding offers an extra layer of consumer protection and ensures the legality of the transaction. Though slower, the closing process in a dry loan means more time to address or mitigate potential issues.
Understanding Wet Closings vs. Dry Closings
Wet loans can proceed through a traditional closing or a dry closing. Real estate closings mark the final transaction involving the sale or exchange of real property. A traditional closing includes:
- Completion of all required buyer and seller documentation.
- Property title transfer to the purchaser.
- Settlement of all pending funds.
On the other hand, a dry closing benefits both the buyer and seller, despite not being a true closing. It occurs when there are funding delays and signing parties are geographically separated. Documents are signed, but no money changes hands immediately.
Special Considerations for Wet Loans
Wet loans are not allowed in Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington. States that permit wet settlements require lending banks to disburse funds within a specific timeframe. Some mandate payment to sellers and other parties on the day of settlement, while others allow one to two days after closing. These laws aim to prevent banks from delaying funding post-signing of closing documents. All prior funding conditions must be met for an authorized closing in wet states.
Related Terms: Dry Loan, Wet Closing, Dry Closing, Real Estate Loan, Mortgage Funding.
References
- JMAC Lending. “Dry & Wet Funding Reference Guide”.
