GAP Funding Explained:

How It Works, When It’s Used, and Why Most Lenders Won’t Take Second Position

In real estate investing, timing and liquidity are everything. Deals move fast, rehab budgets shift, and investors often need short-term capital to bridge the gap between what they have and what they need to close or complete a project.

That’s where GAP funding comes in.

As a private lender, I use GAP loans to help investors stay liquid, stay competitive, and keep projects moving — but there are important nuances borrowers need to understand about how GAP funding actually works in today’s lending environment.

What Is a GAP Loan?

A GAP loan is a short-term, small-balance loan designed to cover the difference between your available capital and the total amount required for down payments, rehab overruns, closing costs, carrying costs, earnest money, or lender-required reserves.

When Can GAP Funding Be Used?

• When the primary lender won’t cover 100% of the capital stack

• When you need to close fast

• When rehab costs increase mid-project

• When your liquidity is tied up in another deal

  
  

Why Most GAP Loans Are NOT Secured by a Second Position

Most private lenders do not want to take second position due to higher risk, foreclosure limitations, title complications, and uncertain recovery.

How GAP Lenders Protect Themselves

1. Unsecured GAP Loans (Most Common)

These loans rely on borrower strength, not property equity. Requirements often include minimum credit scores, clean bank statements, proof of liquidity, and responsible credit behavior.

2. GAP Funding Through the Same Lender

Some lenders offer GAP funding only if they are also the primary fix-and-flip lender, allowing them to control the entire capital stack and secure everything under one first-position lien.

Is GAP Funding Secured or Unsecured?

Most GAP loans are unsecured because lenders avoid second-position exposure. GAP funding becomes secured only when the same lender provides both the primary loan and the GAP loan.

Final Thoughts

GAP funding is a powerful tool when used responsibly. It helps investors close faster, reduce out-of-pocket costs, keep projects on schedule, and scale their portfolio.