What it means
In a property purchase, the closing is the meeting or process in which documents are signed and ownership is transferred. In a wet loan, the lender releases the funds at that point, so the seller receives payment and the buyer takes the keys straight away.
Any remaining checks, such as final title confirmation or missing signatures, are completed afterwards. A dry loan works the other way.
The lender waits until it has reviewed every document and confirmed every condition before sending any money, so the closing may be completed on paper but the cash arrives later. Both approaches exist in practice, and the choice often depends on local practice and law.
The reason this matters to finance teams is risk and cost. When a lender funds early, it carries the risk that a document turns out to be defective or a borrower fails to meet a condition, and it may have to fix the problem after paying out.
It also funds the loan with borrowed money, so every extra day costs interest before the loan is secured and can be sold. Many mortgage lenders finance their loans through warehouse lines, which are short-term credit facilities used to fund loans until they are sold to investors.
A wet loan starts to draw on that line earlier, and the investor who later buys the loan will examine whether the file was complete. Missing documents can lead to the buyer refusing to take the loan or demanding a price cut.
Controls are the answer. Lenders using wet funding typically build in rigorous pre-closing checks, set limits on how long the funds can be out before documentation is finished, and track exceptions daily.
A growing list of loans with outstanding documents is a warning sign that processes need attention.
In practice
Real-world examples.
Example
A homebuyer signs closing documents on a Friday, and the lender sends the money that same afternoon, so the seller is paid and the keys are handed over. The lender's team spends the next week collecting a missing insurance certificate.
Example
A mortgage company sells its loans to an investor every month. The investor rejects a wet-funded loan because the title policy was never delivered, leaving the company holding a $300,000 loan it has to fund itself for another two months.
Example
A small business lender chooses a dry approach for equipment loans, releasing funds only after the equipment invoice and insurance are confirmed. It accepts slower closings in return for lower losses.
Formula
Calculation
Funding cost before documents are complete = loan amount x annual interest rate x days outstanding / 360
Suppose a lender funds a $400,000 loan on closing day using a warehouse line that charges 6% a year, and the missing documents take 3 days to complete. Annual interest = 400,000 x 0.06 = $24,000. Funding cost = 24,000 x 3 / 360 = $200. If the same lender funds 500 such loans in a month, the delay costs 500 x 200 = $100,000.Case study
Seen in the real world.
Riverside Home Loans is an illustrative, fictional mortgage lender that operates in a market where wet funding is common. To win business from estate agents, it promised to pay out on closing day, and its volume rose by 30% within a year.
The finance team then noticed that around 4% of loans had missing documents for more than two weeks, and several investors had refused to buy them. On a book of 1,000 loans averaging $350,000, 40 loans were affected, tying up 40 x 350,000 = $14,000,000 of funding.
Riverside introduced a pre-closing checklist and a daily exceptions report, and cut the problem loans to under 1%. The illustrative lesson is that wet funding is a competitive advantage only when document controls keep pace.
Watch out
Common mistakes.
- Treating a wet loan as a riskier product for the borrower, when the extra risk falls mainly on the lender.
- Assuming that funding on closing day means the file is complete, when documents may still be outstanding.
- Ignoring the interest cost of carrying loans while they wait to be sold or perfected, which can build up across hundreds of files.
Questions
People also ask.
What is the difference between a wet loan and a dry loan?
In a wet loan the money is paid out at closing, while in a dry loan it is held back until all conditions are met.
Who benefits from wet funding?
Buyers and sellers benefit from speed, and lenders can win business, but the lender takes on the documentation risk.
Does the borrower do anything differently?
Not usually, although the borrower may be asked to provide any missing documents promptly after closing.
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