How to Read a Term Sheet for DSCR Loans

You just received a term sheet and it feels like you’re reading a foreign language. 

You’re not alone–regardless of how good your English is, a term sheet can be challenging to interpret. Luckily, Waltz is fluent in speaking about “term sheets.”

In short, a term sheet is a breakdown of how a lender plans to structure a mortgage. Let’s boost your confidence in the loan process by exploring the key concepts within a term sheet.

What is the purpose of a term sheet?

A term sheet outlines the key terms and conditions of a potential investment. It helps you better project the costs of the loan both up front and on a monthly basis.

While a loan proposal is a preliminary quote, a term sheet comes further in the mortgage application process. A term sheet is created using more detailed information that you gave the lender and includes the terms you requested, making it more accurate.

This article will give you a clear picture of how the term sheet comes together. With a term sheet in-hand, you can evaluate whether or not the loan fits your needs as a real estate investor.

Key components of a term sheet

There are many elements within a term sheet, each with a specific purpose for lenders and real estate investors. As a real estate investor, learning how to interpret term sheets will give you a distinct advantage when going through the loan process. 

Borrower information

As part of the loan application, your lender will want to verify your identity. Obtaining personal and business related information helps them paint a full picture of who they are lending to.

Term sheets start with general information about your LLC and personal information such as your residency status, loan type, and FICO credit score. If you don’t have a U.S. credit score, no problem– Waltz doesn’t require this as part of the loan process if you are a foreign national.

Property details

The property details section of a term sheet includes key information such as the property address, type of property (single-family, condo, townhouse, or multi-family), and its sales price (or current estimated market value). It also outlines the lease type (for example 12-month or short-term like AirBnb) and the expected monthly rent, providing a clear picture of the property's financial performance.

All of this information is important because certain property types may have restrictions. If you want to buy a condo as a short-term rental, but the homeowners association (HOA) rules prohibit this activity, the lender will not be able to rent the property for that purpose. You want to know this information so that you can choose your strategy accordingly.

Expected annual costs

In order to operate an effective real estate business, you need to be able to budget for expected costs over the course of a year. Some examples include fixed expenses like property taxes, insurance, and HOA fees (if your property is in that type of community). 

These will factor into the amount of money needed in your escrow, which may be held for your convenience by your lender in reserves to pay for expenses such as taxes and insurance. Keep in mind that your first year of insurance is typically paid ahead of closing.

Loan details

The most extensive part of the term sheet is the loan details section. As you prepare to take a mortgage for your investment property, you need to understand how these factors impact your payments on a monthly basis and over the course of the loan.

Everything from interest rates to loan terms, and much more can be found as line items. Here are the crucial components from this section:

• Loan amount: The total amount you’re borrowing from the lender.
• Interest rate: Percentage charged to you by the lender for borrowing the money. This number can change based on market conditions, your personal financial position, and other factors.
  
  
• Loan term: This is the length of time you have to repay the loan. The most common term is 30 years, however lenders often offer many options.
   
• Loan to value ratio (LTV): Compares the loan amount to the property’s appraised value, this impacts how much you can borrow and what your down payment amount will be. Waltz usually requires 70% LTV (sometimes even 75%)-- for example if a house is worth $500,000, you could potentially borrow up to $350,000 (70% of $500,000).
   
• Debt-service-coverage-ratio (DSCR): DSCR measures the property’s income relative to the predictable debt payments. Lenders want to make sure that the property generates enough revenue to cover the loan. As a general rule of thumb for foreign nationals, Waltz typically needs at least a 1.2 ratio.
  
  
• Amortization: Refers to the way that the loan is paid off gradually over the loan term. For example, a 30 year fixed loan would be amortized over 30 years. Interest tends to make up a larger component of payments early in the amortization schedule and decrease over time.   
  
  
• Pre-payment penalty: This is a fee charged if you pay off the full loan early. Usually this is tied to a certain timeline such as three or five years. Strategically, you need to consider when you plan on selling the property– is this a long-term hold or is it a more short-sighted investment? That will help you decide which option to choose. Another thing to consider is that a five year pre-payment is likely to have a more favorable interest rate versus a three year– be sure to ask your lender about this.

Monthly payment 

Every month after the loan is processed until the loan is paid off, you will have a monthly payment. This is made up of four components: principal, interest, taxes, and insurance. 

One time expenses

At the closing table, you want to have a clear understanding of how much money is needed to buy the property. The final components of a term sheet are all one time expenses. These expenses include:

• Down payment: The down payment is the difference between your purchase price and the loan amount. For example, if you buy a house for $500,000 and your loan amount is $350,000, then your down payment is $150,000. Your down payment will vary depending on the LTV ratio of the property– in this example, the LTV is 70% ($500,000 x .70 = $350,000). Your down payment does not include closing costs or any other additional costs needed to close (see below)./

• Loan origination: Typically a percentage of the loan amount, this covers the lender’s costs for processing and underwriting the loan.
• Legal, admin, and closing: Pretty much everything done behind the scenes to get your loan approved and processed. This includes: coordinating the loan approval, legal services, and paperwork.

Flexible terms for foreign nationals

Now that you understand how to read a term sheet, you can confidently make informed decisions about your investment property mortgage. With this knowledge, you’ll be able to ask your lender better questions and understand how each component affects your bottom line.

With a strong grasp of key elements within a term sheet and the support of a dedicated lending team, you’re in great hands. Waltz is here to guide you to the closing table in as little as 14 days.*