What it is
A term sheet, sometimes called a letter of interest or quote, is a lender's summary of the loan it expects to make. It comes after the lender has reviewed the loan package and before full underwriting. It is usually non-binding on the lender, though it may carry binding provisions such as a deposit, exclusivity or expense reimbursement.
After a term sheet is signed, the lender typically collects a deposit, orders third-party reports, completes underwriting and, if everything checks out, issues a loan commitment.
What's in it
| Term | What to look for |
|---|---|
| Loan amount | Fixed amount or "up to," and the metrics it's subject to |
| Interest rate | Fixed, or floating over an index like SOFR; any floor |
| Term | Initial term and any extension options with conditions |
| Amortization | Schedule, or interest-only period |
| Fees | Origination, exit and extension fees |
| Prepayment | Lockout, step-down, yield maintenance or defeasance |
| Recourse | Full, partial, or non-recourse with carve-outs |
| Reserves | Taxes, insurance, capital, TI/LC, interest reserve |
| Covenants | Minimum DSCR or debt yield tests, cash management triggers |
| Conditions | Appraisal, reports, sponsor requirements, closing timeline |
| Deposit | Amount, what it covers, whether it's refundable |
Comparing term sheets
Two quotes with the same rate can be very different loans. Brokers compare:
- Proceeds. The real number after sizing, not the headline.
- All-in cost. Rate plus fees, including the effect of a rate floor.
- Flexibility. Prepayment terms and extension conditions.
- Risk to the sponsor. Recourse, covenants and cash management.
- Certainty of execution. A lender's track record of closing on the terms it quotes.
A side-by-side table makes the trade-offs visible to the client.
Common mistakes
- Reading the rate and nothing else. A low rate with a heavy prepayment penalty can cost more than a slightly higher, open loan.
- Missing the "subject to." "Up to $15 million" can shrink once the lender's appraisal and DSCR test come in.
- Ignoring the deposit terms. Some deposits are not refundable once reports are ordered.
Where it fits
A term sheet is only as good as the deal that got sent. Scoring deals against each lender's box before sending, as Dori does in lender matching, makes term sheets more likely to come back on terms that hold.