Dry Loan

What is a Dry Loan?

A dry loan is a type of mortgage where the funds are supplied by the lender only after all of the required sale and loan documentation has been completed and reviewed. The rules for dry loans differ from state to state, based on state laws. States that require dry loans are referred to as dry funding states, and real estate closings involving dry loans are known as dry closings. Dry loans are also called dry funded mortgages.

Key Takeways

  • A dry loan is a type of mortgage where the funds are supplied by the lender only after all of the required sale and loan documentation has been completed and reviewed.
  • The opposite of a dry mortgage is a wet mortgage.
  • Whether mortgage loans are “dry” or “wet” is governed by state law.
  • Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington are states that require dry mortgages.

How a Dry Loan Works

Like other types of mortgages, dry loans are debt instruments secured by the collateral of a specified real estate property, which allow individuals and businesses to purchase real estate without paying the full value of the property up front. The borrower repays the loan, plus interest, with a predetermined set of payments over a period of years until they eventually own the property. If the borrower stops paying the mortgage, the bank can foreclose.

Dry loans can be fixed-rate mortgages, where the borrower pays the same interest rate for the life of the loan, or adjustable-rate mortgages (ARMs), which use a fixed interest rate for an initial term, after which the rate will fluctuate based on a particular market index.

In a dry mortgage, the seller does not receive any money from the lender until all of the loan documentation has been fully vetted and processed by the financial institution. In that way, dry funding provides an added layer of protection to help ensure the legality of the transaction. Because dry loans have a slower closing process and no funds are disbursed at the closing, there is more time to address any issues that may arise.

Dry Closing States

The states that require dry mortgage loans are Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington.

A dry loan provides an extra layer of protection to the buyer and the lender against any outstanding legal issues with the sale, but it can result in a slower closing process.

Dry Loan vs. Wet Loan

The opposite of a dry loan is a wet loan. A wet loan is a mortgage in which the funds are made available before all required documentation is completed, and the money changes hands at the time of closing. The specific rules, like those for dry loans, are governed by state laws.

Pros and Cons of Dry Loan vs. Wet Loan

Dry loans offer the buyer and the lender greater assurance that there are no outstanding legal issues with the property involved in the sale. That can, however, slow the closing process, and the seller won’t receive their money until all of the documentation has been completed. That may often take several days to several weeks.

A wet loan can allow buyers and sellers to conclude a transaction more quickly. However, the tradeoff is that unexpected legal issues or other problems may arise afterward.

The Bottom Line

A dry loan—either fixed-rate or adjustable-rate—is a type of mortgage in which the funds are supplied by the lender only after all the required sale and loan documentation has been completed and reviewed. The rules for dry loans differ from state to state. Dry funding provides an added layer of protection to help ensure the legality of the transaction. Because dry loans have a slower closing process and no funds are disbursed at the closing, there is more time to address any issues that may arise.

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  1. Document Systems. “Wet/Dry Settlement.” Accessed Oct. 19, 2021.