Laila Keith
Buying a home can be an exciting but confusing process, especially when it comes to closing and funding. While the two terms are often used interchangeably, they are not the same thing. Closing is the last step of the mortgage process, when all parties sign the loan documents, and the deed to the home is recorded. Funding, on the other hand, is when the lender disburses the funds to the title company or escrow account, allowing the home to be purchased. While closing and funding can happen on the same day, they don't always. The timing depends on various factors, including the purpose of the loan, occupancy, and seller. It's important to understand the difference between closing and funding dates, as you will be responsible for the interest on the loan from the funding date onwards.
| Characteristics | Values |
|---|---|
| Definition of closing date | The closing date is when all parties sign the loan documents and the deed to the home is recorded. |
| Definition of funding date | The funding date is when the lender disburses funds to the borrower's escrow account or the title company, allowing the home to be purchased. |
| Timing of funding date | The funding date can vary and may not be the same as the closing date. It depends on the timing of the closing, the local records office's schedule, and the time of day. |
| Interest accrual | Interest on the loan accrues from the funding date, not the closing date. |
| Access to the property | Buyers are not allowed to access the home until the loan is funded. |
| Dry funding states | Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington |
| Wet funding states | All other states |
| Rescission period | Refinances on primary homes have a three-day rescission period after closing before funding. |
What You'll Learn
Funding and closing dates are different
The funding date and closing date are two distinct dates in the mortgage process, and it is essential to understand the difference between the two.
The closing date, also known as the home closing or the day of funding, is when the lender reviews the borrower's file and determines that all requirements for underwriting and auditing have been met. It is on this day that the borrower signs all the loan documents, including the closing disclosure, which outlines the loan's final terms, such as the total amount borrowed, the interest rate, and the costs to close. The closing date is the last and most important step of the mortgage process, and it is when ownership of the property officially changes hands.
The funding date, on the other hand, is when the lender disburses or pays out the mortgage funds to the borrower's escrow account or the title company. This date can vary and may not always be the same as the closing date. It is on this day that the borrower legally owns the property and can move in. The funding date is crucial because the borrower is responsible for the interest on the loan from that date onwards.
The distinction between wet funding and dry funding states further complicates the difference between funding and closing dates. In wet funding states, all documents must be submitted and approved by the closing date, and the funding amount is confirmed and released on or shortly after this date. In contrast, dry funding states allow for the transfer of loan funds before the closing documents are signed. Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington are examples of dry funding states, while Florida is a wet funding state.
To summarise, the funding and closing dates are distinct and essential milestones in the mortgage process. The closing date involves signing documents and finalising terms, while the funding date involves the disbursement of funds and marks the official purchase of the property. Understanding these differences is crucial for buyers and sellers to navigate the real estate landscape successfully.
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Wet vs dry funding
The day of funding is when the money from your lender is disbursed or wired to your title or escrow company to pay for the home you are purchasing. This is also the day you get your keys and can move in. However, the funding date can vary and may not be the same as the closing date.
The closing date is when all the documents have been officially verified and signed between you and the lender, and the deed to the home is recorded.
Wet funding and dry funding refer to the timing of the funding in relation to the closing date. In states that follow wet funding rules, all documents required to officially close the loan have to be submitted and approved by the closing date. The lender contacts the title or escrow company before closing to confirm the funding amount that needs to be released or wired to complete the transaction. Once confirmed, the lender will order the wire ahead of time, ensuring that the money is disbursed on the date of closing or up to two days later. This way, the funds can be paid out to the seller and other parties right away.
In states that require dry funding, the funding happens after the closing date. A dry loan is a type of mortgage where the funds are supplied by the lender only after all of the required sale and loan documentation has been completed and reviewed. Dry funding provides an extra layer of protection to the buyer and the lender against any outstanding legal issues with the sale, but it can result in a slower closing process. The seller also will not receive their money until all of the documentation has been completed.
- Alaska
- Arizona
- California
- Hawaii
- Idaho
- Nevada
- New Mexico
- Oregon
- Utah
- Washington
All other states follow wet funding rules. However, in California, lenders can choose to follow either wet or dry funding procedures.
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Interest on the loan
Interest is an essential aspect of loans, and it's important to understand how it works. Interest is the profit that banks or lenders make on loans. It is typically expressed as an annual percentage rate (APR), which includes both interest and fees. The higher the interest rate, the more you will pay over the life of the loan.
There are a few factors that can influence the interest rate on a loan. One of the most significant factors is your credit score. Lenders will assess the risk based on your credit score, and if you have a high score, you are more likely to qualify for lower interest rates. Conversely, a low credit score may result in a higher interest rate as the lender seeks to ensure they make their money back even if you default on the loan.
The amount of money you borrow also impacts the interest rate. Generally, the larger the loan amount, the higher the interest rate will be. This is because the lender is taking on more risk with a larger loan. Additionally, the type of loan can affect the interest rate. Secured loans, which are backed by collateral, tend to have lower interest rates, while unsecured loans, such as personal loans, tend to have higher rates.
It's worth noting that the loan funding process can vary. In some cases, the funding date, when the lender disburses the funds, may not be the same as the closing date, when all the documents are signed and verified. This means that you may be responsible for paying interest from the funding date onwards, not the closing date.
To minimise the interest you pay, it's advisable to borrow only what you need and to compare interest rates from different lenders before committing to a loan. Shorter loan terms result in higher monthly payments but lower overall interest, while longer terms have the opposite effect. Additionally, a good credit score and a low debt-to-income ratio can help you secure lower interest rates.
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The role of the title company
The title company also plays a role in protecting homebuyers after the purchase is complete. If an issue arises after closing, and the buyer has title insurance, the title company can investigate and identify potential resolutions. If the claim is covered by the policy, the title company can address the issue, paying legal costs or reimbursing the buyer as necessary.
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The closing disclosure
By law, your lender must provide you with the closing disclosure at least three business days before the closing date. This allows you to compare the final terms and costs outlined in the closing disclosure with the information provided in your loan estimate, which you received when you obtained the mortgage offer. It gives you time to review the document, ask questions, and ensure that all the information is correct before the closing day. If there are any discrepancies or unexpected changes, you can request clarification from the lender.
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Frequently asked questions
The closing date is when all the documents have been officially verified and signed between you and your lender. The funding date is when your lender pays out the mortgage funds to your escrow account or the title company, which finalises the purchase of your home.
You get the keys to your new house on the funding date. However, if your closing happens late in the day or on a Friday, you may have to wait until the next business day to receive the keys.
The funding process involves several steps handled by your lender and the settlement agent who is managing the closing. The lender reviews your file, determines that all requirements for underwriting and auditing have been met, and wires the funds to the title company. The title company then confirms receipt of the lender's funds.
In states that follow "wet funding" rules, all documents required to officially close the loan have to be submitted and approved by the closing date. In "dry funding" states, all mortgage loan requirements have been met, except for the actual funding of the loan. Dry funding states include Alaska, Arizona, California, Hawaii, Idaho, Nevada, New Mexico, Oregon, and Washington.
