Reading a Term Sheet: The Six Lines That Decide the Deal

You can negotiate everything in a term sheet except the things you don’t notice. Most investors read the rate and LTV, then sign. The deals that fall apart three days before closing, or cost $8,000 more than expected, or trap you in a property you need to exit — those failures were written into page one, in lines you skimmed past.

Here are the six lines that actually decide whether your deal works, and what they mean when a lender writes them.

1. Loan Amount vs. “Funds to Borrower”

A term sheet showing a $400,000 loan amount is not promising you $400,000 at closing. It’s showing the note you’ll sign. What you actually receive — labeled “funds to borrower,” “net proceeds,” or “cash at close” — can be $30,000 to $50,000 less.

Here’s the arithmetic on a typical fix-and-flip loan:

That’s a $41,700 gap between what the term sheet headline says and what hits your account. If you’re counting on $400,000 to cover acquisition plus initial rehab draws, you’re $41,700 short on day one.

The line that tells you this is usually in small text under “Estimated Closing Costs” or in a separate fee schedule. Read it before you assume the loan amount is the cash you’re getting.

2. “Interest Reserve” or “Reserves Held”

When a lender holds an interest reserve, part of your loan is set aside at closing and used to pay your monthly interest. You never see that money, but it is part of the note, so you pay interest on it too. Your monthly payment feels like $0; the cost sits inside the balance.

On a $400,000 note at 11.5% with a 6-month reserve held:

• Monthly interest: $3,833
• Reserve held at closing: $23,000
• Interest on the reserve itself over six months: about $1,322 ($23,000 × 11.5% × 6/12)

The reserve protects the lender if you stop paying. For you, the bigger cost is not that $1,322 — it is the $23,000 of loan proceeds that cannot go into the purchase or the rehab, which means more of your own cash at closing. We work the full numbers in what an interest reserve actually costs.

This line appears as “interest reserve,” “impound account,” or “required reserves.” If it’s there, add it to your cost analysis — it’s not free money.

3. Extension Terms and Fees

Your term sheet says 12 months. Your contractor says eight. You believe the contractor. The term sheet’s extension clause is what happens when you’re wrong.

Typical extension provisions on bridge loans:

• Extension fee: 1 point ($4,000 on a $400,000 loan), due in full at the start of the extension period
• Extended rate: Often 1-2% higher than the initial rate (11.5% becomes 13.5%)
• Conditions: Current on payments, no liens, project substantially complete, reserve balance sufficient
• Notice required: 30-45 days before maturity

If the extension requires the project to be “substantially complete” and you’re only 60% done, the extension isn’t available. You’re now in default at maturity, facing refinance or payoff with whatever bridge financing you can find — usually at worse terms than the original loan.

The miss-able detail: extension terms are often written as “at lender’s sole discretion” even when conditions are listed. That means meeting the conditions doesn’t guarantee the extension.

4. Prepayment Penalty Structure

Short-term hard-money and bridge loans usually don’t carry a classic prepayment penalty. The common version is a minimum interest clause: pay off early and you still owe, say, three or six months of interest in total. Longer-term DSCR rental loans are where step-down prepayment penalties live. What matters is how the charge is calculated.

Three common structures:

A six-month minimum is the one to watch on a fast flip: sell in month four and you pay two months of interest on a loan you no longer have. On a DSCR loan, a 3-2-1 step-down means a sale or refinance in year one costs 3% of the balance — the schedules are compared in DSCR prepayment penalties.

The term sheet will bury this in “Prepayment” or “Early Payment Provisions.” It’s one sentence. It can cost you five figures.

5. “Recourse” or “Non-Recourse”

Recourse means the lender can come after you personally if the property doesn’t cover the debt. Non-recourse means the property is the only collateral — if it forecloses short, you walk away.

Most fix-and-flip and bridge loans are recourse, though they don’t always say it explicitly. The term sheet will show:

• Full recourse: You’re signing a personal guarantee. The lender can pursue your other assets.
• Recourse carve-outs: Non-recourse unless you commit fraud, file bankruptcy, or cause environmental damage (common on commercial loans).
• Non-recourse: The property is the sole remedy. Rare on loans under $1M or to first-time borrowers.

The line to look for: “Borrower shall execute a personal guarantee” or “Loan shall be non-recourse except for standard carve-outs.” If it says nothing, assume recourse.

This matters most when the deal goes wrong. A recourse loan on a property that drops 20% in value during your hold can turn into a deficiency judgment against you personally after foreclosure.

6. Draw Schedule and Inspection Fees

For rehab loans and ground-up construction, the term sheet will outline a draw schedule — how renovation funds are released. What’s easy to miss: inspection fees, holdback percentages, and advance-notice requirements.

Standard terms:

• Inspection fee: $150–$350 per draw, paid by borrower
• Retainage (some lenders): 10% of each completed phase held until final completion
• Advance notice: 5–10 business days between draw request and funding
• Maximum number of draws: Often capped at 4–6

The math: if your rehab budget is $80,000, you’re planning six draws and the lender keeps 10% retainage, you’ll need $8,000 of your own money to cover it until final inspection, plus $900–$2,100 in inspection fees (six inspections at $150–$350). That $10,000 wasn’t in your initial underwriting, but it’s required to finish the project.

The killer clause: “Lender may refuse a draw if project is behind schedule or over budget.” That’s discretion written into the term sheet. If your contractor runs long and you need draw four to pay him, the lender can decline it based on timing alone.

When Reading a Term Sheet Is the Wrong Call

If you’re comparing term sheets from three lenders and they’re all within 0.5% on rate and 5% on LTV, the differences in these six lines are what separates a $12,000 problem from a $35,000 one. Read them.

But if you’re looking at a term sheet for a property you haven’t yet tied up, or from a lender you found on page three of Google with no verifiable track record, the term sheet itself is the distraction. A non-binding proposal from a lender with no verifiable closings is not a commitment — it’s marketing. Verify the lender has closed loans like yours, in your state, in the past 90 days, before you spend an hour parsing terms they may not be able to deliver.

And if the term sheet shows an LTV above 90% on a fix-and-flip with no money down and a 7.5% rate, you’re reading a document from someone who doesn’t underwrite loans. Real term sheets reflect real risk pricing.

What to Do With This

Print the term sheet. Highlight these six sections. Run the arithmetic on what you’re actually receiving and what you’re actually paying. If funds to borrower plus your own capital doesn’t cover acquisition and rehab, the loan doesn’t work — no matter what the LTV says.

Then compare the early-exit clause against your expected hold time. If you’re planning a four-month flip and the term sheet carries a six-month minimum interest clause, you’re paying six months of interest on a four-month loan. Negotiate the minimum down or price it into the deal before you sign.

The term sheet is the deal. Everything after it — the closing, the funding, the payoff — is executing what’s written on page one. Read it like you’re the one who has to live with it, because you are.