Dry Closing: What It Is and How It Differs From Wet Funding

When a deal is signed in real estate, it usually means everything has been agreed to and completed. That’s the rule – but every rule has its exception. In the case of closing on a home, the exception is a dry closing.

A dry closing happens when the seller and buyer agree to complete a closing without any money exchanging hands – often to buy time. The paperwork is completed, but the buyer does not receive the keys, and the seller does not receive their funding for a few more days.

Dry closings aren’t common or legal in most states – and they aren’t the norm. But in certain situations, they can help make a home sale happen with less stress for everyone. In this article, we’ll share everything you need to know about dry closings and how they’re different from homes purchased with wet funding.

Dry Closing: What Is It?

A dry closing is an agreement between a buyer and seller to close on a home without the purchase being funded that day.

During your typical mortgage closing, the mortgage and title documents are signed, the loan is funded and ownership is transferred from the seller to the buyer. This common scenario is popularly known as a wet funding (or wet closing) because the transaction is official before the ink on the paperwork can dry. 

Occasionally, things don’t quite work out that way. This is where a dry closing comes in.

With a dry closing, the mortgage and title documents are signed, the lender requirements are met and all other elements of the home buying process are completed – but the money isn’t disbursed. It takes a few business days before the lender funds the loan and ownership of the home is transferred to the buyer. By this point, the ink will have dried – and that’s why it’s described as a dry closing.

Why Do Dry Closings Happen?

Dry closings aren’t common. The practice is only legal in some states. But there are a few reasons why a dry closing might occur.

The buyer’s lender is having funding issues

Mortgage lenders (like banks, credit unions and online lenders) can occasionally have issues with funding. Whether the issues are due to technical difficulties, a backlog of applications or a misplaced form, funding can be delayed for several reasons.

If a lender needs to buy more time to fund a loan, a seller and buyer can agree to a dry closing, allowing them to close without funding and have everything ready to go as soon as the lender can release the funds. This way, both parties can avoid any unnecessary delays.

The buyer needs to sell their home first

In a perfect world, every home buyer would sell their home and use the proceeds as a down payment on their new property. Unfortunately, that isn’t always the case.

If a buyer is selling their home the same day or days before they buy a new one, a dry closing may offer a solution. As soon as they get the proceeds from their home sale, they can pay their home buying costs.

While a dry closing can serve as a workaround for buyers in this situation, it’s important to note that adding a home sale contingency to your purchase offer would be a less risky approach.

Lender requirements haven’t been met

A lender may require that certain information is provided or that repairs are completed before they fund a loan. If closing day is on the horizon and a repair isn’t finished or a key piece of information is missing, a dry closing could help keep the deal together until everything is squared away.

Which States Allow Dry Funding?

There are nine dry funding states:

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

Just because dry closings are legal in these states doesn’t mean dry closings are the norm. A wet closing is often preferred unless a circumstance prompts real estate professionals to consider a dry closing.

How Does a Dry Closing Work?

During a wet closing, the mortgage and title documents are signed, the loan is funded and ownership is transferred from the seller to the buyer. This is the quintessential social media picture. The one with the big smile on your face, your keys raised over your face and the “So, I did a thing, y’all!” caption. While funding may take a day or two to process, the closing is 100% done on closing day.

A dry closing is a little different. On closing day, the mortgage and title documents are signed, but the buyer doesn’t receive the keys and the seller doesn’t receive their funding for a few days.

Once the loan is funded, ownership of the property is officially transferred to the buyer.

How Should You Prepare for a Dry Closing?

Whether it’s a wet closing or a dry closing, the buyer and seller will sign several documents at the closing table. This usually includes the mortgage, deed of trust or security deed and title insurance.

In addition to signing the standard documents, buyers and sellers should be aware of a few things when it comes to dry closings:

For buyers

Buyers must have a solid understanding of their financing. They should know how much money they need to bring to the table and when to make it available. In some cases, the buyer may get away with waiting until the loan is funded to wire their down payment, but this will vary by lender.

Buyers should also make sure they have a place to stay because they won’t be able to move into their new home until the loan is funded and keys are exchanged.

For sellers

Sellers must understand that they won’t receive their money immediately. In some cases, the seller might work out an arrangement with the buyer such as renting the property for a few days so they have a place to stay until they close on their new home.

A dry closing can be a bit more complicated than a wet closing, but as long as both parties know what to expect, a dry closing can be helpful.

Dry Closing Risks

Dry closings have a few potential downsides, but they’re more likely to be inconveniences, not major problems that could cause funding to fall through.

Because both parties must agree to a dry closing, it’s helpful to know what risks buyers and sellers face. 

• Lengthier closing process: Rather than the typical 3 days from Closing Disclosure to closing table, both parties will need to wait a few more days after a dry closing before they receive their respective prize: payment for the seller and finalized ownership for the buyer.
• Issues tied to contingencies: In a typical real estate transaction, there are often contingencies that must be met before a sale is finalized. If a dry closing is necessary because contingencies haven’t been met, there is always a concern that the deal could fall through.

Dry Closings Don’t Mean Dead Deals

While there are some risks associated with dry closings, remember: The deal is not dead if a dry closing is required. In many cases, a dry closing is simply a way to buy a little more time to get everything in order.

If you’re in the middle of buying a home and a dry closing is suggested, now you know that it’s no big deal. Yes, it may take a few more days to take full ownership of your new home, but this strategy may be exactly what was needed to get you to the funding finish line!