Understanding Your DSCR Loan Term Sheet

A DSCR loan term sheet is the document that spells out every material condition of your loan before you commit. It's not the final loan agreement — that comes at closing — but it's the foundation. Everything on the term sheet should match what appears in your closing documents. If it doesn't, that's a problem.

Most investors spend weeks shopping for rates and minutes reviewing the term sheet. That's backward. The term sheet contains provisions that affect your investment returns for years: prepayment penalties, rate adjustment mechanics, escrow requirements, and recourse terms. Missing a single clause can cost you thousands.

Here's every section of a typical DSCR term sheet, what it means, and what to watch for.

Loan Amount and Loan-to-Value (LTV)

The first section is straightforward but sets the foundation for everything else.

What You'll See

• Loan amount: The dollar amount you're borrowing
• Appraised value / purchase price: The property value used for LTV calculation
• LTV ratio: Loan amount ÷ property value, expressed as a percentage

What to Watch For

• Which value is used? For purchases, lenders typically use the lower of appraised value or purchase price. For refinances, it's the appraised value alone.
• Cash-out amount: If it's a cash-out refinance, the term sheet should specify the maximum cash-out and any limits (some lenders cap cash-out at 70% LTV even if rate/term refinances go to 75%).
• LTV tiers: Many lenders price in LTV tiers. Going from 75% to 80% LTV might add 0.25–0.50% to your rate. Make sure the LTV on the term sheet reflects what you discussed.

Interest Rate and Rate Structure

This section defines what you'll pay for borrowing the money and how that payment may change over time.

Fixed-Rate Loans

• Interest rate: The rate for the life of the loan (typically 30 years)
• This rate will not change — what you see is what you pay, every month, until the loan is paid off or refinanced

Adjustable-Rate Mortgages (ARMs)

ARM structures are more complex. Common DSCR ARM types:

• 5/6 ARM: Fixed for 5 years, adjusts every 6 months after
• 7/6 ARM: Fixed for 7 years, adjusts every 6 months after
• 10/6 ARM: Fixed for 10 years, adjusts every 6 months after

ARM Terms to Understand

• Index: The benchmark rate used for adjustments (typically SOFR — Secured Overnight Financing Rate)
• Margin: The fixed amount added to the index to determine your adjusted rate (typically 3.0–4.5%)
• Initial adjustment cap: Maximum rate increase at the first adjustment (typically 2.0%)
• Periodic adjustment cap: Maximum rate increase at each subsequent adjustment (typically 1.0%)
• Lifetime cap: Maximum rate increase over the life of the loan (typically 5.0–6.0% above the initial rate)
• Floor rate: The minimum rate, even if index + margin falls below it (often equals the initial rate)

Example ARM Adjustment

Starting rate: 7.00% on a 5/6 ARM

• Index (SOFR) at first adjustment: 4.50%
• Margin: 3.25%
• Calculated rate: 4.50% + 3.25% = 7.75%
• Initial adjustment cap: 2.00%
• Maximum at first adjustment: 7.00% + 2.00% = 9.00%
• Actual adjusted rate: 7.75% (below the cap, so the calculated rate applies)

If SOFR were at 7.00%, the calculated rate would be 10.25% — but the cap limits it to 9.00% at the first adjustment.

Watch for: Some term sheets omit the floor rate or the adjustment caps. Ask for these explicitly. A lifetime cap of 5% on a 7.00% starting rate means your rate could theoretically reach 12.00%. Make sure you can handle that payment.

Points and Fees

This section details your upfront costs beyond the loan interest.

Origination Points

• What it is: A fee charged by the lender, expressed as a percentage of the loan amount
• Typical range: 0.5–2.0 points (1 point = 1% of loan amount)
• On $300,000 loan: 1.5 points = $4,500

Discount Points

• What it is: Optional prepaid interest to buy down your rate
• How it works: Each point typically reduces your rate by 0.125–0.250%
• When it makes sense: Only if your hold period exceeds the break-even point (usually 4–7 years)

Lender Fees

Look for these line items:

• Processing fee: $500–1,500
• Underwriting fee: $500–1,500
• Document preparation fee: $200–500
• Admin/wire fees: $50–250
• Rate lock fee: Some lenders charge separately; others include it

Third-Party Costs (Estimated)

• Appraisal: $400–700
• Title insurance: Varies by state and loan amount (typically $1,000–3,000)
• Recording fees: $100–500
• Escrow/settlement fee: $500–1,500

Watch for: Junk fees disguised under vague names. "Technology fee," "investor review fee," or "compliance fee" are often negotiable or unjustified. Ask what each fee covers.

Prepayment Penalty

This is one of the most consequential terms on the sheet and the one investors most frequently overlook.

Common Structures

Step-down (most common for DSCR):

• 5-4-3-2-1: Pay 5% of the outstanding balance if you pay off in year 1, 4% in year 2, etc.
• 3-2-1: Pay 3% in year 1, 2% in year 2, 1% in year 3, none after
• 2-1: Pay 2% in year 1, 1% in year 2, none after

Yield maintenance:

• More complex — based on the present value of remaining interest payments
• Generally the most expensive form of prepayment penalty
• Common in commercial DSCR loans over $1M

Dollar impact example on a $400,000 loan:

Watch for:

• Does the penalty apply to sale AND refinance, or only refinance? Some lenders waive the penalty on sale.
• Is there a partial prepayment allowance? Some loans allow 20% principal paydown per year without penalty.
• Does the penalty apply if the property is destroyed or taken by eminent domain? (It shouldn't — but check.)

DSCR Requirement

The term sheet should specify the minimum DSCR the property must maintain.

What You'll See

• Minimum DSCR: The threshold (typically 1.0–1.25) the property must meet based on the appraisal
• DSCR calculation method: Which income and expenses are included
• DSCR at closing: The actual ratio based on the appraisal and final loan terms

Pricing Tiers

Many lenders price differently based on DSCR:

• DSCR ≥ 1.25: Best rates (base pricing)
• DSCR 1.00–1.24: Add 0.25–0.50% to rate
• DSCR 0.75–0.99: Add 0.75–1.50% to rate (if available)

Watch for: Confirm which DSCR tier your loan falls into and that the rate on the term sheet reflects that tier. If the appraisal rent comes in lower than expected, your DSCR drops and the rate may increase from what was originally quoted.

Recourse vs. Non-Recourse

This determines your personal liability if the loan defaults.

Non-Recourse (Most DSCR Loans)

• The lender's remedy is limited to the property itself
• If you default and the property sells for less than the loan balance, the lender absorbs the loss
• You are NOT personally liable for the deficiency

Standard Carve-Outs (aka "Bad Boy" Guarantees)

Even non-recourse loans include exceptions where you become personally liable:

• Fraud or misrepresentation on the loan application
• Intentional property damage or waste
• Environmental contamination you caused
• Unauthorized transfer of the property
• Filing bankruptcy on the borrowing entity to delay foreclosure
• Misappropriation of insurance or condemnation proceeds

Full Recourse

Some DSCR loans — especially for borrowers with lower credit or higher LTV — are full recourse. This means the lender can pursue your personal assets if the property doesn't cover the debt.

Watch for: Don't assume non-recourse. Read the term sheet and confirm. If it says "recourse" or "full recourse," understand that your personal guarantee backs the loan.

Escrow and Reserve Requirements

Escrow (Impound) Accounts

Most DSCR lenders require escrow accounts for:

• Property taxes — Lender collects monthly and pays annually
• Insurance premiums — Lender collects monthly and pays at renewal

Some lenders offer escrow waivers for borrowers with lower LTV (under 65–70%), sometimes for an additional 0.125–0.250% in rate.

Reserve Requirements

Separate from escrow, lenders require you to have liquid reserves at closing:

• Typical requirement: 6–12 months of PITIA
• Acceptable assets: Checking, savings, money market, stocks, bonds, retirement accounts (often discounted to 60–70% of value)
• NOT acceptable: Equity in other properties, pending income, cryptocurrency (at most lenders)

Watch for: The term sheet should specify both the number of months required and what qualifies as reserves. If your reserves are tight, confirm whether retirement accounts count and at what discount.

Loan Term and Amortization

Loan Term

How long you have to repay:

• 30-year term — Most common for DSCR loans
• Interest-only period — Some lenders offer 1–5 years of interest-only payments, followed by 25–30 year amortization. This lowers your monthly payment and improves DSCR during the IO period.

Interest-Only Terms to Understand

• IO period: The months/years of interest-only payments (typically 12–60 months)
• IO monthly payment: Significantly lower than amortizing payment
• Post-IO payment: When amortization kicks in, your payment jumps. On a $300,000 loan at 7.5%, the IO payment is $1,875/month. The fully amortizing payment is $2,098/month — a 12% increase.

Watch for: If your DSCR is marginal with a fully amortizing payment, an IO period can help you qualify. But make sure the property's income can support the higher payment when amortization begins.

Property and Entity Requirements

Property Conditions

• Occupancy status: Must be non-owner-occupied (investment property)
• Property condition: Must meet minimum habitability standards; no major deferred maintenance
• Insurance requirements: Types and amounts of coverage required
• Permitted use: Rental only, or does the lender allow short-term rentals?

Entity Conditions

• Vesting: How title must be held (LLC, corporation, individual)
• Guarantor: Who personally guarantees the carve-outs (usually the managing member)
• Entity seasoning: Some lenders require the entity to exist for a minimum period (30–90 days)

Conditions Precedent to Closing

The term sheet will list conditions that must be satisfied before the lender funds the loan. Common conditions include:

• Satisfactory appraisal (value and rent)
• Clear title with no unacceptable liens
• Proof of insurance meeting lender requirements
• Entity documents (operating agreement, EIN, good standing certificate)
• Executed lease(s) or market rent verification
• Satisfactory property inspection (if required)
• Verification of reserves
• No material changes to borrower's credit profile

Watch for: Open-ended conditions like "satisfactory to lender in its sole discretion." These give the lender an out for any reason. Push for specific, objective conditions whenever possible.

Frequently Asked Questions

Is a term sheet legally binding?

Generally, no. Most DSCR term sheets include language stating they are non-binding indications of terms, not commitments to lend. The binding agreement is the loan documents you sign at closing. However, certain fees (appraisal deposit, rate lock fee) may be non-refundable even if the loan doesn't close.

Can terms change between the term sheet and closing?

Yes. If the appraisal comes in low, your DSCR changes, or your credit score drops, the lender may adjust terms. Rate locks protect the interest rate for a specified period, but other terms (LTV, points, conditions) can shift. Review your closing disclosure carefully and compare it line-by-line to the term sheet.

What should I do if I don't understand a term on the sheet?

Ask. Specifically, ask your loan officer to explain the term in plain English and provide a dollar-amount example of how it affects you. If they can't explain it clearly, that's a red flag about their expertise.

How long is a term sheet valid?

Typically 3–7 business days for rate-sensitive terms (unless you've locked your rate). Non-rate terms like LTV, prepayment structure, and reserve requirements usually remain stable for 30+ days. If more than a week has passed, request an updated term sheet.

Should I have an attorney review the term sheet?

For your first DSCR loan, it's worth the $300–500 for a real estate attorney to review it. They'll spot issues you might miss — especially around recourse provisions, prepayment penalties, and rate adjustment mechanics. For subsequent loans with the same lender, you'll know what to look for.

What's the difference between a term sheet and a loan estimate?

A term sheet is the lender's summary of proposed terms. A Loan Estimate (LE) is a standardized federal form (required under TRID) that breaks down costs in a specific format. Not all DSCR lenders are required to provide an LE (business-purpose loans are often exempt), but many do voluntarily. If your lender provides both, compare them — they should match.

The Bottom Line

Your DSCR term sheet is the blueprint for your loan. Every number on it — rate, points, prepayment penalty, reserves, recourse — directly impacts your investment returns. Read it completely, compare it to competing offers, ask questions about anything unclear, and confirm that your closing documents match. The 30 minutes you spend understanding the term sheet can save you thousands of dollars and years of headaches.