When a lender sends you a term sheet, the instinct is to skim it quickly, see the rate, see the loan amount, and move forward. But a term sheet is one of the most important documents you’ll ever receive in your financing journey. It’s not legally binding, but it sets the tone, expectations, and structure for the loan you’re about to take. And if you misunderstand even a single line, the consequences can follow you all the way into closing.
A term sheet is essentially the lender’s proposal. It outlines the terms they are offering based on the preliminary information you submitted. Because it’s not final, borrowers often assume the details aren’t important yet. That mindset is dangerous. Every condition, every number, every fee on a term sheet can affect your cash-to-close, your monthly payments, your construction budget, or your ability to refinance later.
Start With the Basics
At the top of every term sheet are the fundamentals: loan amount, rate, amortization, and loan type. These numbers look simple, but they need context. A low rate doesn’t mean a cheap loan if the fees are high. A high LTV doesn’t mean strong leverage if there are heavy reserves. The key is to read these details in relationship to each other.
Understanding Rates, Points, and Fees
Most borrowers look only at the interest rate. That’s the first mistake. The true cost of capital includes origination points, underwriting fees, processing fees, and third-party costs. A 9% rate with 0 points is often better than an 8% rate with 3 points. Term sheets rarely highlight this, so you must do the math yourself.
Leverage Terms: LTV, LTC, ARV
The leverage section determines how much money you need to bring to closing. LTV applies to stabilized rentals. LTC applies to fix-and-flip and construction. ARV applies when the lender is basing the loan on future value. Mixing these up is the fastest way to underestimate your cash-to-close.
Reserves and Holdbacks
This is the category that shocks most borrowers. Some lenders require interest reserves to be collected upfront. Others require construction holdbacks, contingency reserves, or minimum liquidity requirements. If you miss these line items, your entire project budget can collapse.
Conditions and Documentation
Every term sheet lists preliminary conditions: insurance requirements, entity documents, appraisals, environmental checks, and more. These conditions become underwriting tasks later. If you aren’t prepared for them, delays are guaranteed.
Expiration Dates and Prepayment Penalties
Term sheets expire. Some within 7 days, some within 30. A borrower who signs but delays documentation can lose the original terms. Prepayment penalties also matter—especially for investor loans. A great rate can be overshadowed by a harsh prepay.
Final Thoughts
A term sheet is not just a preview—it’s a roadmap. When you understand how to read it, you protect yourself from hidden costs, unexpected conditions, and stressful closing delays. Successful investors don’t rush through term sheets. They dissect them. And that’s why they consistently close strong deals while others get blindsided.
If you want professional help reviewing or comparing your term sheets, reach out. A 10-minute review can save you thousands.
WhatsApp: +1 448-230-7488.
Email: annie@insightflending.com
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