A term sheet is the lender's written summary of the deal they are willing to do on your specific property: how much they will lend, against what, at what cost, for how long, and what has to be true before they fund. It is not a commitment to lend and it is not a loan approval. It is the document that tells you whether the deal still works once financing is priced in, which is exactly why you should read every line of it instead of skipping to the rate.
Here is what each section means, what a good one contains, and the four lines that decide whether your project makes money.
The loan amount, and what it is a percentage of
The top of the sheet will show a total loan amount, and on a rehab loan it is almost always split in two: an initial advance at closing toward the purchase, and a rehab holdback that is released in draws as work is completed. Read them as separate numbers, because only the first one shows up at the closing table.
Underneath that sit the two ratios that produced it. Loan to cost is the percentage of your total project cost, purchase plus rehab budget, that the lender will fund. Loan to value is the percentage of the after repair value they will lend against. A rehab loan is capped by both at once, and the lower result wins. Our rehab loan program page publishes the current ceilings, and the mechanics of which one binds on a given deal are worked through in what a hard money loan actually is.
What to check: does the loan amount on the sheet match what you get when you run both ratios yourself on your own numbers? If it is lower, something in your budget or your ARV was adjusted during underwriting, and you want to know what before you sign.
Cash to close
A good term sheet states this explicitly. A weaker one leaves you to derive it. Your cash to close is the purchase price minus the initial advance, plus points, plus third party closing costs, plus any interest reserve or prepaid items, plus your share of the rehab that the holdback does not cover.
That last piece catches people. If the lender funds a percentage of cost and you are covering the remainder, your remainder is not spread evenly across the project. It typically shows up at closing. Ask the question directly: what is the wire amount, to the dollar, on closing day?
Rate, points, and how interest is charged
Three separate things live here and they are often conflated.
- Points are an origination fee, quoted as a percentage of the loan amount, paid once at closing. Two points on a $300,000 loan is $6,000, and it is spent whether you hold the property six months or six weeks.
- The rate is annual interest, and on a rehab loan it is usually interest only, so your monthly payment is interest on the balance rather than principal and interest.
- What the interest is charged on is the line people miss. Interest on the drawn balance means you pay only on money you have actually received, so the rehab holdback does not accrue until you draw it. Interest on the full loan amount, sometimes called full boat or non dutch, means you pay on the entire commitment from day one. On a long rehab that difference is thousands of dollars. Find this line and read it.
For a short hold, points usually matter more than rate, and for a long one the relationship flips. We ran the crossover math in points versus rate on a flip loan, which is worth ten minutes before you compare two term sheets on rate alone.
Term, extensions, and prepayment
The term is how long you have before the loan matures. The extension terms are what happens if you are not done, and they belong on the sheet rather than in a conversation. Look for how many extensions are available, how long each one runs, what each costs, and what conditions apply, because an extension is often conditioned on the project being substantially complete and the loan being current.
Prepayment matters in the other direction. On a rehab loan, no prepayment penalty means selling early costs you nothing extra, which is what you want when the plan is to sell in seven months. A minimum interest provision, sometimes written as a guaranteed number of months of interest, is the thing to watch for instead. It means an early payoff still owes interest for a set period. That is not the same as a prepayment penalty, and it has the same effect on your net.
The draw schedule
This section tells you how you get your rehab money back. A real term sheet will say how many draws are included, what an inspection costs and who orders it, how long between a draw request and funding, whether draws are reimbursement based, and whether there is a minimum draw size.
Reimbursement based is the default, and it is the single most important operational fact on the page. You pay the contractor, then the inspector verifies the work, then the lender reimburses. That means you are carrying the cost of each phase out of pocket until the draw clears, and your working capital needs to be sized for it. An investor with a $60,000 rehab budget and $8,000 of liquidity will stall in week three no matter how good the loan terms look.
Conditions to close
Usually a list near the bottom, sometimes the longest section, and the one that actually determines whether you close on time. Expect to see:
- An appraisal, often with an as is value and an after repair value
- A title commitment with the lender named, and clear title
- Evidence of insurance with the lender listed as mortgagee and loss payee, in the right policy form for a vacant property under renovation
- Entity documents: the operating agreement, the certificate of existence, the EIN
- A detailed scope of work with line items and costs, not a one page summary
- Proof of liquidity, usually recent bank statements
- A personal guaranty and a credit pull meeting the minimum score
- A contractor's license, insurance, and sometimes a signed contract
Read this list the day you receive it and start on the slowest items immediately. Insurance in the correct form and entity documents are the two that most often delay a closing, and both are entirely within your control.
What a term sheet is not
It is not a commitment. Most term sheets say so directly, and the ones that do not still mean it. Funding remains subject to the appraisal supporting the value, title coming back clean, and underwriting confirming what you represented. If the ARV comes in below what your file assumed, the loan amount moves, because the LTV ceiling moves with it.
It also usually carries an expiration date and sometimes a deposit for third party costs. Know whether that deposit is refundable and under what circumstances before you send it.
The four lines that decide the deal
If you read nothing else on the page, read these:
- Cash to close. Can you actually wire it, and does anything remain afterward?
- What interest accrues on. Drawn balance or full commitment.
- Draw terms. Reimbursement based or funded ahead, inspection turnaround, and cost per draw.
- Term plus extension cost. Because your project will take longer than you planned, and the honest version of your carry math uses the realistic timeline. Our breakdown of monthly holding costs on a house flip shows what each extra month actually costs once taxes, insurance, utilities, and interest are counted.
Questions worth asking before you sign
Ask what would cause the loan amount to change between the term sheet and closing. Ask who orders the appraisal and how long it takes. Ask what the draw turnaround has actually been on recent files, not the policy number. Ask what happens if the budget grows mid project, since that is common and the answer varies. And ask what the payoff process looks like when you sell, including how many days notice the lender needs for a payoff statement.
A lender who answers all of that plainly is telling you something useful about how the rest of the loan will go. The term sheet is the first real look at how an organization operates, and it is worth reading like one.