When you close on a loan, there has to be funding. That’s how the money exchanges hands. There are two types of funding that you may experience – wet funding or dry funding.
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It’s important to understand the difference as it pertains to how and when the seller (or you in a refinance) receive the funds.
What is a Wet Funding?
At a wet funding, the loan funds immediately at the closing table. In fact, the funds are at the closing before you arrive. Also known as table, funding, this method means:
- All conditions have been cleared on the loan
- The broker (if applicable) will close the loan in his or her name at the table
- The broker transfers the loan to the lender’s name immediately
Lenders must be 100% certain all conditions are cleared with a wet funding. Once the money exchanges hands, the deal is done. This could mean slight delays in the closing process if you haven’t cleared all of your conditions yet. Work closely with your lender, especially as you near the closing date to make sure there aren’t any potential issues.
At a wet funding, all parties receive their funds at the table. The seller receives his or her net proceeds after deducting the fees he or she must pay. The seller will know exactly how much he or she is receiving before the closing. The funds are distrusted in the form of a check.
All other interested parties also receive their checks. The closing agent writes checks to each party including:
- Appraiser
- Attorney
- Title company
- Closing agent
- County (for taxes)
The closing agent distributes every penny right at the table, while the ink is still wet.
What is a Dry Funding?
A dry funding is the opposite. You essentially close on the loan, but no funds exchange hands. It’s dry because it’s not official. This closing option isn’t as stressful leading up to the big day because there’s still time after the closing to clear conditions.
The loan package and your closing documents go to the lender’s funding department. These professionals go over your package with a fine-toothed comb. They ensure that every condition is met and that all closing documents are properly signed.
It’s during this time that the funding department looks for any signs of fraud too. This is to protect the lender should anything suspicious come up, funding could be delayed or canceled. The funding process can take between 1 and 4 days. It depends on the complexity of the loan and the lender’s workload.
Only nine states require a dry funding – all others still use the wet funding process.
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What’s Better?
So what type of funding is better for you – the borrower?
Wet funding has its advantages:
- You know all of the conditions ahead of time. There aren’t any last-minute unpleasant surprises or delays. If you have conditions you must satisfy, you do it before the closing.
- Everyone receives his or her funds right away. This means you get the keys to the home right away too.
- There’s a lower risk of the deal falling through at the last minute.
Dry funding has its advantages too:
- You have more time to address any issues. You can still close the loan on time, but have a few more days to supply proof of any outstanding conditions.
- You have more time to pay debts that the lender requires paid.
- You have more time to address any last-minute issues with the seller.
Avoiding a Delay in Closing
No matter what type of funding you have, there’s always a risk of a delayed closing. In order to avoid this, you must do the following:
- Stay in close contact with your lender. Always know what they need and provide it quickly. Any delays you create will put the lender even further behind, which can delay your closing.
- Don’t make any sudden changes, such as job changes, large deposits in your account, or ruining your credit. Keep everything as stable as you can.
- Ask as many questions as you need before the closing to make sure you understand everything.
- Know all conditions that the lender requires that you settle at the closing and make sure you have the appropriate documents.
Dry and wet funding both have the same end result – the loan funds. But, getting there can be a little more stressful for those that live in a dry funding state. Either way, make sure you clear all conditions and talk with your lender often to make sure you are all on the same page.
