Wet Loan: Definition, How It Works, Risks, and State Rules

Key takeaways
* A wet loan (wet funding) is a mortgage where funds are disbursed at or immediately after signing, before all closing documentation is complete.
* Wet funding speeds up purchases but increases risk for lenders and can raise fraud or default exposure.
* Not all states permit wet funding; several western states require funds to be held until paperwork is complete.

What is a wet loan?

A wet loan is a mortgage in which the lender releases funds at—or immediately upon—the loan closing, before final review and recording of all sale and loan documents. This allows buyers to take possession and sellers to receive payment faster than with traditional funding.

How wet funding works

• Loan approval is obtained and closing documents are signed.
• Funds are released at closing (or within a short statutory window) even if title searches, surveys, or some paperwork haven’t been fully processed.
• The lender completes its documentation review after funds are disbursed.

Wet loans are intended to accelerate transactions, especially when buyers, sellers, or title agents are geographically separated or when timing is critical.

Wet loans vs. dry loans

Wet funding:
* Funds disbursed at or immediately after signing.
* Faster closings and quicker possession.
* Greater risk for lenders and sellers because documentation may not be fully reviewed.
Dry funding:
* Funds disbursed only after all documents are completed, reviewed, and recorded.
* Slower process but stronger legal protection and lower fraud risk.

Wet closings vs. dry closings

Traditional closing: All required documents are signed, funds are settled, and title transfers when the transaction is complete.

Dry closing: Documents may be signed at a meeting for convenience, but no funds are exchanged until the lender completes funding. A dry closing is effectively a preparatory signing rather than final disbursement.

State rules and wet-settlement laws

Wet funding is permitted in most U.S. states, but several states prohibit disbursing funds before required documents are completed or recorded. States that do not allow wet funding include:
* Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, Washington

Other states may have “wet-settlement” laws that require lenders to disburse funds within a specified short period (for example, same day or within one to two days) to prevent lenders from delaying funding after closing documents are signed.

Risks and special considerations

• Lender risk: If documentation later reveals title issues, fraud, or underwriting problems, the lender has already disbursed funds and faces legal and financial exposure.
• Seller risk: Sellers may receive funds before buyer obligations are fully verified.
• Borrower risk: Faster funding can lead some buyers to accept loans before fully assessing affordability, increasing default risk.
• Lender conditions: Even in wet states, lenders typically require that key pre-funding conditions be met before allowing wet funding.

What lenders evaluate

Common underwriting checks before approving funding include:
* Income and employment verification
* Credit history and score
* Debt-to-income ratio
* Stability of income and employment
* Property valuation and basic title review

Bottom line

Wet loans can speed up real estate closings and help when timing is tight, but they increase risk for lenders and, in some cases, sellers. Because laws vary by state and practices differ by lender, borrowers and sellers should confirm local rules and understand the trade-offs before proceeding with wet funding.