Wet loans and dry loans are types of mortgages that dictate how you buy a home. The main difference between both types of mortgages is the way the funds for the home purchase are released by the lender. As such, the wet loans vs. dry loans debate is something that homeowners should pay attention to. It can make a big difference between purchasing a home successfully, and getting rejected at the last minute. Due to how they work, they appeal to home buyers differently.
In this short guide, we will look at what both types of loans mean and their differences.
| Wet Loan | Dry Loan | |
| Transfer Of Funds | Before signing paperwork | After reviewing paperwork |
| Risk Factor | Big | None |
| Time To Get Loan | Almost Instant | Delayed |
What Is A Wet Loan?
A wet loan is a type of mortgage where the lender releases the money for the home purchase before signing the necessary paperwork. In some cases, the borrower might allow the transfer while the paperwork is being signed. Because of this, wet loans are illegal in many states. In states where wet loans aren’t prohibited, the laws and rules regarding their use vary.
What Are the Advantages Of Wet Loans?
The main advantage of using a wet loan is that the borrower can purchase a home much faster since they don’t have to wait to sign any paperwork. This allows the borrower to complete the paperwork afterward. Once the borrower signs the paperwork and documents, the bank, or lender, will perform a review.
What Is the Disadvantage Of Wet Loans?
In a wet closing, the transfer of money happens before the review of documents. That means the borrower can revoke the mortgage if they deem the loan too risky after reviewing. If this happens, the borrower is the one that ultimately loses. Not only do they end up without the funds, but without a seller. Despite that, more states are wet states than dry states. This means that more states allow wet closings.
What Is A Dry Loan?
A dry loan is a type of mortgage where the lender transfers the money after reviewing the necessary paperwork and documents. Dry loans are safer for borrowers and lenders since they minimize risk and mortgage revoking.
What Are the Advantages Of Dry Loans?
One advantage of dry loans is that they ensure the legality of the home purchase. Banks and financial institutions have more time to go through the details of the agreement and identify potential mistakes. Since the transfer of money happens after the review of documents, it gives the borrower more time to rectify these mistakes. The funds are released by the borrower the moment all the documents and paperwork have been fully vetted. With that said, dry states have explicit rules regarding how long the lender can hold the funds.
What Is the Disadvantage Of Dry Loans?
The biggest disadvantage to dry loans is that funds are kept by the lender for as long as they’re performing the review. While this usually takes a few days, the waiting process can last for weeks. This prevents the buyer from buying the property and the seller from selling the property. So ultimately, it’s up to the financial institutions and their speed of vetting that determines how long both parties have to wait. The state prevents the lender from delaying the process too long.
Wet Loans vs Dry Loans – The Difference
The main difference between wet loans and dry loans is the way funds are transferred. As such, the wet loan vs dry loan debate comes down to two things – convenience and security. Wet loans are more convenient for buyers since they allow the purchase to go faster. Dry loans aren’t convenient, but they are more secure.
Mortgage fraud statistics show an upturn of fraud for the first time since 2014. In 2020, “1 in 164 mortgage applications” showed an indication of fraud. Dry loans look to eliminate mortgage fraud by adding an extra layer of security. Before investing in real estate, bear in mind the state you’re investing in and their laws regarding both types of loans.
Here is a table that shows which states fall in the wet and dry loan category.
| Wet Loan States | Dry Loan States |
| Alabama, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, West Virginia, Wisconsin, Wyoming | Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, Washington |
Partner at Vega Capital Management - a private funds management company.
An experienced portfolio manager with 10+ years of proven and reputable track record in investment management and financial analysis. Currently, a partner at one of the fastest-growing private fund management companies in southeast Europe, Kiril has been tending to a loyal international base of client-investors and partners. When he is not crunching numbers and increasing his client’s wealth, he reminisces about his Michelin-star restaurant cheffing years and fondness of the culinary arts.
