A wet loan is a home loan – a mortgage – in which the funds are released to the borrower either before all the paperwork is completed, or almost simultaneously with the signing of the loan documents.
In some US states, where laws have been introduced to prevent bank fraud and unnecessary delays in the release of funds, wet loans are available.
Some US states still continue to forbid these types of loans, because the risk of mistakes or fraud is considerably greater.
In states where wet loans are permitted, the borrower is in a much better position to move faster when making home-purchase deals.
Among the US states that do allow wet loans, local laws regarding their use vary.
Example of a wet loan
Imagine you want to purchase a property you saw this morning at 52 Harold Road. It is a seller’s market – homes are selling rapidly – and you need to guarantee to the seller – Mrs. Robinson – that you are able to close the loan within two weeks.
Mrs. Robinson says she accepts your offer, but adds that she is only willing to go ahead if you really can close the loan in less than two weeks.
You ask your lender, usually a bank, for a wet loan. Your lender approves the mortgage and gets the closing completed within two weeks.
This is done even though not all the paperwork will be ready by then. For all this, you will have to pay an additional fee.
After all the paperwork is completed, your lender will double-check the documentation to make sure that everything has been done properly.
Wet loan vs. dry loan
A Dry Loan is the opposite of a wet loan. A dry loan is a mortgage where the funds are only supplied after all the required loan and sale documentations are completed and checked.
For the purchaser and seller, a dry loan provides more insurance that the whole deal will be completed without problems.