Q: We recently sold a property and our purchaser went VA. At the time of settlement, we were charged interest for two additional weeks. The title company told us we had to pay interest up to the date that our mortgage holder was paid off. Is this the legal thing to do when selling property under the GI Bill? We were not made aware of this at the time we signed the sales contract.
A: You are raising the question about a so-called "wet settlement." In the real estate trade, a wet settlement is one where the lender puts up all of the loan proceeds at settlement. Generally speaking, the title attorney or title company conducting settlement gathers in all of the proceeds - from the lender as well as from the buyer - records the appropriate documents and disburses the funds to all parties.
Needless to say, the faster the funds are deposited with the settlement office, the faster that full disbursement will take place.
A dry settlement means that the monies have not yet been made available, despite the fact that settlement has taken place. In the District of Columbia, and for many years in Virginia, lenders "played the float." Although a mortgage lender often begins to charge interest to the purchaser from the date of settlement, the actual loan may not be made for several days (or weeks) later.
Not only does this hurt the buyer - who pays interest on money not actually loaned - but prevents sellers from paying off their loans for a period of time after settlement.
All mortgage lenders collect interest on a daily basis. Thus, if settlement takes place on Monday, Nov. 20, but the loan is not paid off until the following Monday, at least seven additional days of interest must be charged to the seller.
In Maryland, the law requires that the mortgage loan proceeds for the buyer be at the settlement table. In Virginia, a law that became effective in July requires mortgage lenders to have the proceeds of the loan available at settlement.
However, because of the way this law is written, it has not really been that effective. In reality, many Virginia lenders are still delaying sending the mortgage loan proceeds to the settlement table, but to comply with the law, they just don't charge the buyer interest for a few days.
While this certainly helps the buyer, it does not solve the seller's problem. Since the settlement proceeds ar still not available for several days after settlement, the seller's mortgage continues to run with interest accruing on a daily basis.
The fact that a Veterans Administration loan was involved in your transaction really has nothing to do with the dry settlement. The lenders look to the local law, as well as the custom and practice in this area. In New York, I am informed, there is instant disbursement to sellers immediately after settlement.
However, as described above, in the Washington metropolitan area, even with wet settlements it often takes three to five business days before the seller's lender is paid in full.
Here are a couple of suggestions to protect sellers from paying unnecessary interest on their mortgage after settlement:
1. When you sign a contract for the sale of your house, specifically state that the settlement proceeds will be disbursed on the date of settlement, or the purchaser will pay all expenses incurred as a result of any delays. While this is certainly negotiable between the buyer and the seller, it is perfectly legal if all parties to the contract are in agreement.
2. Contact the office that will conduct settlement on the sale of your house. Ask your real estate agent to assist you in expediting the buyer's check. Often, a little push to your buyer's lender will produce the check at the settlement table - even though the law may not require this.