A DSCR loan term sheet is a proposed financing summary, usually subject to underwriting, valuation and other conditions. Before paying fees, reconcile its proceeds, payment, prepayment terms and cash-to-close with the actual lender documents. The most useful audit asks what can change, who decides and which money is refundable if the transaction doesn’t close.
Use the seven-point scorecard below to record unanswered questions. It is an organizational aid, not a fraud detector or legal review. Every dollar example is hypothetical. An expensive proposal can be accurately disclosed, while a cheap-looking proposal can leave important obligations unresolved.
Why a Term Sheet Is Not a Commitment to Lend
A letter of intent can describe what a lender is willing to consider without obligating it to fund. Read the conditions, expiration, acceptance language and any binding fee or exclusivity provisions. A document can be nonbinding on loan funding yet contain enforceable obligations elsewhere. Ask qualified counsel to explain those distinctions before signing.
Begin with the identity of the proposed funder. Is the sender the lender, a correspondent or a broker shopping the file? Who has credit authority? Who holds the deposit? Verify the entity through an independent, established channel and ask whose underwriting conditions remain. A familiar logo on a PDF doesn’t answer those questions.
For a $350,000 purchase and an expected $280,000 loan, the term sheet might advertise 80% LTV. If accepted value falls to $330,000 and the same cap applies to that lower value, proceeds become $264,000. The extra $16,000 equity is a closing problem even if the note rate stays unchanged. Record the valuation basis beside the advertised LTV.
A conventional mortgage and a business-purpose DSCR loan can have different documentation and disclosure frameworks. The CFPB’s business-purpose exemption provisions make purpose classification relevant; a product label alone doesn’t determine every applicable rule. Don’t assume that all consumer forms or protections apply, or that business-purpose treatment eliminates state-law obligations.
Read the DSCR loan fundamentals before comparing a rent-based ratio with NOI-based underwriting. The term sheet should identify which rent is accepted, which payment is tested and whether the lender can stress either figure. A stated minimum without its equation is insufficient for an accurate proceeds estimate.
Red Flag 1: Upfront Due-Diligence Fees Before Basic Fit Is Confirmed
An advance fee deserves scrutiny when the recipient, service, refund terms or basic program fit isn’t clear. The brief’s $500 figure is a screening prompt, not a legal ceiling or a test of legitimacy. A legitimate appraisal can cost more; a smaller unexplained fee can still be inappropriate.
Ask for an itemized invoice identifying lender charges, broker charges and third-party report deposits. Is an appraisal already ordered? Is the amount a vendor estimate or a retained administrative charge? If the loan fails before ordering, who refunds the unused amount and when? Put the answer in writing instead of relying on a sales conversation.
Basic fit review should resolve obvious blockers before avoidable expense. Confirm property type, legal unit count, occupancy, loan purpose, geography and borrower category. An appraisal cannot turn an owner-occupied request into an eligible business-purpose rental loan. If credit or entity review remains unresolved, identify that risk before authorizing the next report.
Suppose the borrower pays a $1,800 report deposit. The agreement might allow the lender to apply $1,250 to an appraisal and $200 to another authorized service, leaving $350 unused. Whether the remainder must be returned depends on the actual agreement and applicable law. Ask for the accounting; don’t assume the full deposit is a fee earned on receipt.
Never send money because an emailed wire instruction looks professional. Confirm the payee and account through a telephone number obtained independently from the established company relationship. A last-minute instruction change is a reason to pause. The scorecard doesn’t validate a payment destination and should never collect account numbers.
Red Flag 2: A Hidden Five-Year Hard Prepayment Charge
Prepayment terms can dominate the cost of a loan that will be sold or refinanced early. Identify the trigger, charge base, schedule, permitted curtailments and any exceptions. A “hard” penalty may apply to a sale as well as a refinance; confirm the signed definition rather than inferring it from the adjective.
On an assumed $280,000 outstanding balance, a 5% charge is $14,000 and a 3% charge is $8,400. That arithmetic isn’t a payoff quote. The contract might use a different balance, minimum-interest rule, yield-maintenance formula or event-specific treatment. Obtain an estimated payoff from the lender or servicer for the intended exit date.
A five-year period isn’t automatically illegal, and a step-down isn’t automatically inexpensive. Compare a flat charge with an actual annual schedule using your planned hold. If a refinance is likely after eighteen months, calculate that exit rather than using the lower charge available only after year four. The prepayment penalty guide explains the questions to ask.
Place the prepayment provision beside any rate advantage. Saving $50 monthly for eighteen months produces $900 of payment relief; it doesn’t offset a $10,000 larger exit charge. The exact comparison also needs principal balances and fees, but this initial check can reveal an obvious mismatch between the financing structure and the business plan.
Red Flag 3: Floating Spread Language and Rate Retrading
A quoted rate can be indicative until a lock is accepted and its conditions are met. Ask whether the number is fixed, floating or tied to a benchmark plus spread. Identify which component can change, the observation time, lock expiration, extension cost and the treatment of material changes to the file.
A market move and an underwriting adjustment are different explanations. If a lender changes the quote after appraisal, request the revised LTV, DSCR or eligibility calculation and the matching pricing provision. If the rate moves because no lock existed, ask why the earlier communication appeared firm. Neither situation should be hidden behind a single unexplained new payment.
For the illustrative $280,000 balance over thirty years, 7.50% requires about $1,957.80 monthly P&I. A different note rate changes that payment even if fees remain constant. Rebuild the rent-to-PITIA ratio, cash budget and cash-to-close after a pricing change. Don’t treat a qualifying ratio calculated from the original quote as current.
The dated market benchmark panel provides source context, not a lockable DSCR offer. Treasury and conventional mortgage benchmarks can move differently from a lender’s DSCR grid. Compare written proposals on the same day where possible, and record whether each one is indicative or locked.
Red Flag 4: Six Months of Impounds Without an Escrow Breakdown
An initial escrow deposit and an ongoing escrow cushion are different amounts. A closing may require funds for bills coming due soon, while the cushion addresses timing and unexpected disbursements. Ask for the projected payment dates and running balance, not merely the number of months collected.
For covered transactions, Regulation X’s escrow rule generally limits the cushion to one-sixth of estimated annual disbursements, subject to its provisions. Whether that rule covers a business-purpose loan needs separate analysis. A six-month collection at closing isn’t automatically a six-month cushion or proof of a violation.
With hypothetical $4,800 annual taxes and $1,800 insurance, combined monthly budgeting is $550. Six monthly equivalents are $3,300. Determine how much is an initial deposit for scheduled bills, how much is a cushion and whether an insurance premium is also prepaid separately. This avoids counting the same payment twice in your cash requirement.
Keep escrowed funds separate from unrestricted reserves. Money held for taxes can’t simply be spent on a vacancy or roof. The reserve planning guide helps distinguish lender-required liquidity from settlement deposits. A proposal can meet an escrow requirement while leaving the investor with an inadequate operating reserve.
Red Flag 5: Appraisal Charges Without a Defined Scope
A Form 1007 rent schedule is not the same deliverable as a full property appraisal or commercial narrative report. Comparing a $2,500 total order with an assumed $900 rent-schedule component doesn’t establish a markup. Ask what was commissioned and which charges belong to which service.
Request the property type, forms, inspection scope, rent analysis, rush charges, review fees and appraisal-management charges. Confirm who orders the report and whether the lender will accept it. A borrower-ordered report from an unapproved provider can create a second expense without advancing the file. Review the Form 1007 appraisal guide for the distinction between market rent and valuation.
If the collateral has five or more units, mixed use or unusual condition, a residential fee comparison may be irrelevant. Commercial appraisal work and environmental diligence answer different questions. Request a written estimate and authorization process for additional reports. A high fee calls for scope verification before an accusation of misconduct.
An appraisal payment also doesn’t buy the target value or requested rent. Ask how a lower result affects proceeds, whether a documented reconsideration process exists and whether another lender can use the completed work. Report ownership, delivery rights and lender reliance can differ; don’t assume that paying once guarantees portability.
Red Flag 6: Loan Proceeds That Ignore Holdbacks and Funding Conditions
Gross loan amount is not net cash available for purchase or refinance. Repair holdbacks, lender charges, financed costs and existing-lien payoffs can consume proceeds. Reconcile the term sheet to a sources-and-uses statement before deciding that the balance covers your funding requirement.
Suppose a $280,000 loan has a $10,000 repair holdback and $6,000 of charges withheld at funding. Only $264,000 remains before any other deductions. The borrower may eventually recover holdback funds after satisfying conditions, but that doesn’t make them available for closing. Record release evidence, deadlines, inspection cost and the consequence of unfinished work.
In a refinance, add the actual payoff, accrued interest, penalties and lien-release charges. A cash-out label doesn’t guarantee positive cash to the borrower. Request a net-proceeds calculation and keep funds needed for later repairs separate from funds available to settle the existing debt.
Red Flag 7: Recourse, Transfer Restrictions and Unresolved Conditions
Read the guaranty and covenants before choosing a loan because the borrower is an LLC. Entity ownership doesn’t automatically eliminate personal obligations. Identify who signs guarantees or indemnities, what transfers require consent and whether subordinate debt or ownership changes are prohibited without approval.
A short LOI may omit important servicing requirements. Ask about distribution restrictions, insurance renewals, tax reporting, cash management and maturity. If the loan has a balloon, test the remaining balance against conservative future refinancing assumptions. An attractive initial payment doesn’t resolve the maturity risk.
Request a written list of remaining conditions with an owner and deadline for each. Separate conditions you can document from decisions controlled by the lender or third parties. A clear condition list is more actionable than a verbal assurance that underwriting is almost finished.
Term Sheet Risk Auditor & Fee Scorecard
Term Sheet Risk Auditor & Fee Scorecard
Educational worksheet. Entered assumptions are not rates, approval, legal advice or promised investment returns. No documents or identifiers are collected. Local saves can be lost when browser data is cleared.
Mark each category only after you have a written answer. Seven completed categories mean the worksheet questions are answered, not that the lender is safe or the contract has passed legal review. Compare two proposals using the same facts, and export a copy of your notes without private account or identity information.
The Five-Point Negotiation Script: Document Possible Savings
Ask for changes in a way that produces a comparable proposal. First, request the exact fee scope and refund policy. Second, request an exit-cost illustration for your expected sale or refinance. Third, ask which rate and price are locked. Fourth, reconcile escrow, reserves and net proceeds. Fifth, request the remaining conditions and proposed closing timeline.
You can phrase it directly: “Please show the amount, recipient, service and refund conditions for every advance charge. If we stop before ordering the appraisal, identify what is returned.” This targets an answer that can be checked rather than demanding an arbitrary discount from a vendor cost you haven’t understood.
For an illustrative negotiation, removing a duplicated $800 charge, reducing a negotiable $1,200 lender fee by $400 and choosing an acceptable alternative that lowers a modeled exit charge by $2,000 changes the comparison by $3,200. That isn’t a promised closing saving: the exit component occurs later, and the changes may not be available on your deal.
Use the closing-cost breakdown to preserve that distinction. Charges, prepaids, refundable deposits and future exit costs belong on different lines. Then compare the actual funding sources using the lender channel guide. A transparent lender can still decline a file; transparency and approval are separate questions.
Keep a comparison history when negotiations produce several versions. Label each proposal with its date and identify the superseded version. A reduced fee in the latest email may be offset by a different lock period, balance or prepayment provision elsewhere. Ask the lender to issue one reconciled document rather than combining favorable terms from separate drafts. Before signing, compare that document with the actual closing package and flag any difference for the responsible professional. The scorecard is most useful when its answers refer to the final proposed terms, not a mixture of earlier conversations.
Record the quote’s change triggers: Beside each term-sheet number, note whether it is fixed, floating, estimated or conditional, and which event can change it. Request an explanation when the final funding worksheet differs. Comparing the headline rate alone can miss a holdback or cash contribution that changed after the original proposal.
Frequently asked questions
Is an advance fee above $500 automatically a scam?
No. Amount alone doesn’t establish legitimacy or misconduct. Verify the recipient, ordered service, program fit, written authorization and refund conditions. An unexplained charge below $500 also deserves questions.
Does a signed LOI guarantee funding?
Usually not by itself. Read the specific conditions and any binding fee or exclusivity provisions. Only the actual documents and applicable law determine the obligations created by acceptance.
Is a five-year prepayment period always prohibited?
No universal conclusion can be drawn from duration alone. Applicability, state law, purpose and contract terms matter. Have the provision reviewed and obtain a payoff illustration for the planned exit.
Can the scorecard replace legal review?
No. It records whether seven practical questions have written answers. It doesn’t authenticate the lender, interpret contracts, determine legal compliance or make a credit decision.
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