Dry Funding States: What States Allow Dry Funding in Real Estate?

By Bill Lyons | Published on October 11, 2023

How funds are handled in real estate transactions varies based on various factors, including location. Understanding these differences, such as the concept of dry funding, can help you streamline the buying or selling experience.

Different states have adopted either a wet or dry closing practice, impacting the timeline and mechanics of closing procedures. As you learn the specifics, knowing whether you live or purchase property in a wet vs. dry closing state can be crucial in setting expectations and ensuring a seamless process.

So, what is a dry closing? Keep reading to learn more about dry closing and how it works.

What Is Dry Funding?

Dry closing in real estate is a term that describes a specific type of property transaction process. In a dry-funded real estate transaction, the mortgage lender doesn’t disburse the loan funds until all paperwork required has been completed, signed, and reviewed for accuracy and compliance.

Essentially, the process is “dry” because the funds aren’t immediately liquid or “wet” at the closing table, meaning they’re not ready to be accessed yet.

To help you understand dry closing, let’s consider an example. Imagine a home buyer is getting a home loan in a dry funding state. They sign all the required paperwork and complete the necessary formalities. However, instead of receiving the funds for the home immediately during closing day, there’s a delay.

The lender first reviews the paperwork, ensuring all stipulations have been met. Then, after a thorough review, which can take several days, the funds are disbursed to the seller to finalize the purchase.

States That Permit Dry Funding

The way real estate transactions are handled varies from state to state. While some states practice wet funding, others adhere to a dry closing method. Those states include:

• Alaska
• Arizona
• California
• Hawaii
• Idaho
• Nevada
• New Mexico
• Oregon
• Washington

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What Is the Difference Between Dry Funding and Wet Funding?

As discussed, dry funding means the mortgage lender doesn’t disburse the loan funds until all the required paperwork has been completed, signed, and reviewed. The term “dry” is symbolic and implies that the deal isn’t liquid or finalized immediately after the paperwork is signed at the closing table.

This method ensures that all paperwork is in order, reducing the risk of errors or fraud. It also guarantees all terms and conditions are met before funds exchange hands. That said, dry funding can lead to a delayed funds transfer that leaves sellers waiting–often days–to receive their money after signing.

Another method many states use is wet funding, which is the opposite of dry funding. With wet funding, the lender disburses the funds immediately once all parties sign the loan documents and contracts, making the transaction “wet” with liquid funds. This process is quicker, allowing the seller to receive their money and the buyer to take possession of the property without delay.

Now that you understand both funding methods, let’s compare them:

• Timeline: The most apparent difference between wet and dry closing in real estate is the timeline. Wet funding states see a quicker turnover between the signing of documents and the disbursement of funds. In contrast, dry funding states require a longer waiting period while the paperwork undergoes review.
• Procedure: In wet funding, the emphasis is on speed. All that’s required is the signing of the documents to initiate the fund transfer. Dry funding is more meticulous and requires a thorough review of all documents before releasing funds.
• Geographic differences: Historically, whether a state practices dry or wet funding is determined by regional regulations. For instance, many western states in the U.S. follow dry funding, while the eastern states lean toward wet funding.
• Accuracy: Wet funding poses a higher risk of overlooking document errors or potential fraud because it’s quicker. On the other hand, dry funding tends to reduce these risks.

In some states, lenders have the flexibility to choose between a wet or dry closing. Whether wet vs. dry closing is better than the other depends on individual needs and the specific circumstances of the transaction. Sellers who prioritize speed might prefer wet funding to access their funds. On the other hand, buyers who want to ensure every detail is perfect might lean towards dry funding.

Since wet closings appeal to all parties eager for a quick transaction, they may be favored for straightforward loan structures or small loan amounts, where lenders perceive less risk. However, these types of closings can inherently carry more risk since funds are released before a comprehensive review. Many lenders may be more inclined to proceed with wet closings because they trust their infrastructure to identify and rectify discrepancies.

Consequently, lenders may lean toward dry funding if a deal seems risky or if there are any irregularities that warrant a closer examination of documents.

How Does Dry Funding Affect Buyers?

Ultimately, dry funding can affect the home-buying process by impacting timelines, accuracy and assurance, negotiations, and other factors involved. If you live in a dry funding state, it’s important to know how this process may affect you.

Here’s what to know if you’re a buyer in a dry funding state:

• Prolonged waiting periods: For home buyers, the most significant implication of dry funding is the wait. Unlike wet funding, dry closing requires patience. This means that even if you’ve signed all the documents needed and are ready to move into your new home, you might have to wait several days before the deal is finalized to take possession of the property.
• Assurance: While waiting can be frustrating, dry funding offers buyers an added layer of protection. Since the funding doesn’t go through until all the paperwork is reviewed, buyers will get peace of mind knowing that every detail has been scrutinized, reducing the risk of potential errors, oversights, and fraud.
• Impact on moving schedules: The delay in disbursement can affect your moving schedule. If you’ve planned your move based on the assumption that you’d get immediate possession of the property after signing the documents, dry funding could be inconvenient and require you to reschedule movers or arrange temporary housing.
• Costs: Closing costs aren’t the only expenses you have to worry about with dry closings. Delays could sometimes translate to additional costs for the buyer. For example, suppose the buyer has to spend extra days at a hotel due to a delay in the process. In that case, those are additional expenses they didn’t account for initially.
• Emotional implications: Buying a home is an emotional journey. After the excitement of finding the perfect home and the relief of completing the paperwork, a delay due to dry funding can lead to a mix of anxiety, anticipation, and frustration. Ultimately, buyers just want to move into their homes as soon as possible, and dry closing could prevent that.
• Impact on contingent sales: Buyers selling a property where the purchase is contingent on the sale of their existing home may find dry funding adds another layer of complexity. Delays may affect the timing of their next purchase, especially if they rely on their sale funds to finance their new property.
• Negotiation flexibility: Dry funding occasionally allows for further negotiations or last-minute term amendments. Since the funds haven’t been disbursed yet, both parties might find it easier to tweak various aspects of the deal.
• Increased scrutiny: Lenders in dry closing scenarios might engage in more rigorous due diligence since they’re not under immediate pressure to release the funds. This could mean further scrutiny in some aspects, including credit checks, appraisals, and inspections. While this can elongate the process, it can also benefit buyers by ensuring a more thorough review of the property’s worth.

Keep in mind that a dry closing won’t affect which type of home loan you get. However, it may impact the timeline and fund disbursement.

Ensure a Successful Closing Process

Navigating the home-buying journey requires more than a simple understanding of the closing process. Knowing whether you live in a dry funding state can help you prepare for closing day while setting expectations on when the funds will be disbursed and how soon you can move into your new home.

Preparing yourself for the home-buying process is easier when you use the right tools and work with the right team. Download the Griffin Gold app to manage your financial wellness, review your mortgage options, and browse real estate listings—all in one place!

Of course, partnering with the right experts is a crucial step that can help you prioritize your interests for a smooth closing. Griffin Funding is committed to streamlining the various complexities involved in the mortgage process to reduce potential stressors and guarantee a seamless transition to homeownership. Get a mortgage pre-approval today.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.