Wet Loan: What it is, How it Works, Special Considerations

What Is a Wet Loan?

A wet loan is a mortgage in which the funds realize at—or with the completion of—a loan application. Submission of other required documentation for closing the property, such as surveys and title searches, happens after the dispersion of funds.

Wet loans allow the borrower to purchase property more rapidly and to complete the necessary documentation after the transaction. Conditions surrounding the use of wet loans differ based on state laws, and not all states allow a wet loan.

Understanding a Wet Loan

​​​​​​​In a wet-funded mortgage, the borrower receives money at the time their loan is approved. The borrower may then purchase property and complete the other required documentation to officially transfer the property title. After the transfer of funds, the bank will obtain the loan documentation for review. Wet loans expedite the purchasing process by allowing the sale to occur before the paperwork is completed.

Wet Loans vs. Dry Loans

With wet-loan transactions, speed comes at the price of increased risk. The likelihood of fraud and loan default is significant with a wet loan. The risk comes from the seller receiving funds before the review and approval of the loan documentation. If, after evaluation, the bank determines the loan is too risky, it faces great time and expense in revoking the mortgage.

In contrast, a dry loan is one where the release of funds is after completion and review of all necessary sale and loan documentation. Dry funding provides an added layer of consumer protection and helps to ensure the legality of the transaction. With a slower closing process and no funds disbursed at the closing, there’s more time to address or avoid issues.

Dry loans date to pre-electronic banking days, when property buyers and sellers often lived far apart from one another and their mortgage lenders, so transactions took longer. The dispersal of funds happens when the mortgage is considered officially closed. The new owner can take possession of the property at this point.

Wet Closings vs. Dry Closings

Wet loans may go through either a traditional closing or a dry closing. A real estate closing is the completion of a transaction involving the sale or exchange of real property. A conventional closing consists of the following events:

• All necessary buyer and seller documentation are completed.
• The property title transfers to the purchaser.
• All funds pending are settled.

In contrast, a dry closing takes place for the benefit and convenience of both the buyer and the seller, but in itself it is not technically a closing. A dry closing usually occurs when there has been some delay in the funding of the loan and buyer and seller are geographically separated. Dry closings allow for the signing of documents, but no money changes hands.

Special Considerations for a Wet Loan

Wet loans are permitted in all states except Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington. States that have wet-settlement laws require lending banks to disburse funds within a certain period. Some require payment to the sellers and other involved parties on the day of the settlement; others allow payment within one or two days of closing. Wet-settlement laws are in place to curb the bank practice of delaying funding after closing documents have been signed by the borrowers. All of the before-funding conditions must be met for the lender to allow closing in wet states.