What is a Dry Loan?

A dry loan is a specific type of mortgage where the funds are supplied after all of the required sale and loan documentation has been completed and reviewed. For the buyer and seller, dry loans provide more insurance that the transaction will be completed without problems. The conditions of dry loans differ from from state to state; the requirements differ based on state laws.

How a Dry Loan Works

Dry loans are a category of mortgages, debt instruments secured by the collateral of specified real estate property that 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 many years until he or she eventually owns the property. If the borrower stops paying the mortgage, the bank can foreclose.

A dry loan is also called a dry funded mortgage. In a dry mortgage, the seller does not receive any money from the lender until all the loan documentation has been fully vetted and processed by the lending financial institution. Dry funding provides an added layer of consumer 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.

A dry loan provides an extra layer of protection to the buyer and seller, helping ensure the legality of the mortgage.

That said, a dry mortgage can still come in many forms. Dry loans include fixed-rate mortgages, where the borrower pays the same interest rate for the life of the loan, and adjustable-rate mortgages, which use a fixed interest rate for an initial term and rates that fluctuate with market interest rates thereafter.

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 obtained before all required documentation is completed. This allows the borrower to purchase property at a more rapid pace and also allows the borrower to complete the necessary documentation after the transaction. Wet loan conditions, like those for dry loans, are governed by state laws. Wet loans are permitted in all states except Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington.