In this guide, I’ll provide some information about gap funding (aka down payment money) – why private lenders don’t offer it, ideas on how to find gap funders, and a few alternative options to get funding for residential rehab fix & flip projects.
Many real estate investors visit our website looking for gap funding or what they might call down payment money. It’s essentially when they have financing lined up with another lender for the majority of the project, including the purchase and the rehab of the property, but they don’t have money for the down payment.
So they’re seeking another lender to come in and second position or in an unsecured loan to provide the remainder of the funds. This type of funding is almost impossible to find, and it’s not offered by professional private lending companies or what you might call hard money lenders.
So it’s gonna be extremely difficult to find it. And the only way you might find it is through some individual investors that you may know through local networks or through some REI clubs. But it’s not something you’re ever gonna find by searching online. And if you do find something online where it says they’re gonna offer you gap funding, the likelihood of that happening is very slim. If you do find gap funding, it’s probably gonna be by a very unsophisticated investor who doesn’t know much about real estate private lending, and one that’s actually never experienced a foreclosure before. The process of foreclosing on a second position is extremely difficult.
And second position mortgages are only really feasible in certain states throughout the country where the foreclosure laws are favorable to having a junior lien gap funding. If you can find, it would only be possible with a residential fix and flip deal. There’s no way you’re ever gonna find a gap funder for a property that’s gonna be held as a rental. There has to be some value add to the property. So it’s gotta be a rehab project, construction project, even more complex than a rehab project. But typically, you have to be adding value to the property in order for it to make sense.
At Lender Link, we only deal with professional private lending companies, which are also known as hard money lenders to these lenders.
Gap funding doesn’t make sense. It’s too risky, and a lot of times they’re not even willing to have another lender come in the second position as a gap funder in a deal where they’re funding the first or senior position. If you don’t have any of your own money into the deal or very little, you have nothing to lose. And if there’s any problem that comes up during the project, you can easily walk away and then the lender has to take over and try to finish the project. So if you find someone who wants to be a gap funder, maybe their experienced real estate investor who doesn’t mind taking over the project, but the likelihood is they’re probably gonna be a lender that doesn’t have any experience and they’ve never experienced a foreclosure before because the foreclosure process is a nightmare. And in most states throughout the country, a lender that’s in second position will get wiped out. There is hardly any protection for second or junior liens in most states throughout the country.
If you still wanna find gap funding, here’s a few suggestions. The first one is start doing some networking in your local area. Visit real estate investment clubs where you can meet people in person and you may find someone who does offer gap funding, or you can ask other real estate investors if they know of someone. In that case, the investors’ more likely gonna be a bit more experienced and have done this before. Another option is to search title records within your county to find out which deals are residential fix and flip, and also ones that have a second lien on them or a second mortgage more specifically. So when you find out which ones have a second mortgage that may be a gap funder, you can find out who that person is or that company is that’s offering it, and reach out to them directly instead of seeking gap funding secured by the subject property.
Another option is to get a loan outside of the property, meaning a personal loan or a small business loan. Personal loans are readily available online, and there’s tons of companies that offer them. They really just qualify based on your personal credit, and they do a background check and they may look at income, but it’s a very easy process in general. You just apply online and they’ll tell you instantly if they can offer you a loan. The interest rates are very high, but it’s pretty quick to get it approved, and then they just wire the money to your bank account. The loan amounts for personal loans
are generally pretty small. It could be anywhere from $10,000, maybe up to a hundred thousand, but more likely between 10,000 and $50,000.
All real estate investors are essentially small business owners, so if your company has a track record of showing income for the last two years or three years or longer, you may be able to get small business financing instead of a personal loan. We have a partnership with a company ghat does offer small business financing and we can provide you with that recommendation.
And finally, the last alternative to gap funding is to get 100% financing for residential fix and flip deal. Now, this is also not very common. There’s hardly any lenders out there that offer it, but we do have a few on our platform and it’s only available in select areas. For example, we have a lender that’s in Wisconsin that offers a hundred percent financing, but only in the state of Wisconsin. Others we have are in Texas. We have a couple in California, and then we also have one that does a hundred percent financing throughout the East Coast and Midwest. Sometimes these a hundred percent financing programs come with a lot of requirements. And you’re gonna need to pay the points at closing, which typically is anywhere from two to 5% of the loan amount. You’re also gonna need to have cash to pay for the first phase of the rehab project out of pocket and then the lender will likely reimburse you after that.
And then also you’ll need to have some cash reserves in case a project goes over budget. So if you can’t find any gap funding and you don’t qualify for a hundred percent financing, most other lenders throughout the country are gonna require you to put down anywhere from 15 to 20% of the purchase price. And they typically fund a hundred percent of the renovation costs. Or they may structure it to where it’s 85% of the total project costs and you put in 15%. There’s other lenders that have other structures like a lender that maybe fund a hundred percent of the purchase, but then you’d have to pay the entire rehab budget out of pocket, but you’d have to put those funds into an escrow account.
Stay Informed About Private Lending
