How to Read a Private Lender Term Sheet

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Not long ago, a developer called our office about a construction project he was ready to build. He had a quote in hand from another lender. Therefore, he wanted a second opinion before he signed. The terms he read off were a 9.99 percent rate and 1.25 points at origination.

For a ground up project of his size, those were genuinely competitive numbers. In fact, I was about to tell him it was a good deal.

Then he added one more detail. “Oh, and there is also this 3.5 percent loan fee.”

That single sentence changed the entire economics of his loan. What looked like 1.25 points of cost was actually 4.75 points once we counted every fee. On a multimillion dollar loan, that difference exceeds one hundred thousand dollars. Moreover, it sat quietly below the headline numbers the whole time.

He was not careless. Instead, he was a capable borrower reading a document designed to be read quickly. This guide shows you how to read a private lender term sheet section by section. We use the same structure in our own term sheets. As a result, the next quote you review should hold no surprises.

What a private lender term sheet is

A term sheet is a one to two page summary of a proposed loan. Some lenders issue it as a letter of interest or letter of intent. It does not contain every term of the credit facility. Instead, it lays out the key terms that become the foundation for the final loan documents. Most borrowers use this document to compare lenders. For that reason alone, it deserves a slow and careful read. If you are still comparing loan types first, start with our guide to bridge loans versus hard money loans.

The parties: borrower and guarantors

First, the term sheet names the borrowing entity. This is often an LLC formed to hold the property. It also names the guarantors, the individuals who personally stand behind the loan. Most private money loan terms include full recourse. In other words, the guarantors remain responsible for repayment beyond the collateral itself. That is standard, and there is nothing wrong with it. However, every guarantor should understand they are signing personally. If your entity has partners, know who is guaranteeing what before the documents arrive.

Loan purpose

Not every private loan is a business purpose loan. Private lenders can and do make consumer purpose loans as well. However, the two carry very different regulatory frameworks, and many private lenders choose to originate only business purpose loans. Business purpose examples include purchasing investment property, funding construction, or refinancing commercial debt. The stated purpose on your term sheet matters legally, so it should reflect reality, not convenience. Consequently, a lender who asks careful questions about your use of proceeds protects both of you. Our private money loans FAQ covers this distinction in more detail.

Collateral and lien position

Next, this section identifies the property securing the loan and the lien position. For example, a first deed of trust on a specific address. First position means the lender gets repaid first if the property sells or forecloses. Second position loans exist too. However, they carry more risk for the lender and higher pricing for you. Confirm that the stated position matches your understanding, especially if the property already carries debt. Curious how lenders and investors view these positions? Our trust deed investing guide explains the other side of the table.

Loan amount and the lesser of formula

You will often see the loan amount written as a formula. For instance, the lesser of 700,000 dollars or 40 percent of the total collateral value. This means the dollar amount is a ceiling, not a promise. If the valuation comes in below expectations, the loan shrinks with it. Therefore, ask two questions. What valuation is the lender assuming? Additionally, what happens to your closing if the number comes in light?

Interest rate and payments

The rate is the number everyone quotes at dinner parties. Honestly, it is usually the least misleading item on the page. The payment structure beside it matters just as much. Most bridge loan term sheets show interest only payments. This keeps monthly payments lower. However, the principal balance never declines. Your exit must therefore retire the full original balance, whether that exit is a sale or a refinance. Many investors exit into a long term rental loan, which our DSCR loan guide explains step by step.

On construction loans, ask one more question. Does the lender charge interest on the full loan amount or only on funds actually drawn? A 9.99 percent loan charging interest on drawn funds can cost far less than a 9 percent loan charging interest on the entire balance from day one. The term sheet should say which one you are getting. If it does not, ask. Our guide to construction loans for contractors covers this in depth.

Term and extensions

Bridge loans are short by design, commonly 12 to 24 months. Real projects run long. As a result, the extension language reveals how a lender thinks about your success. The strongest structure is an automatic extension. For example, 12 months plus one automatic 6 month extension as long as the loan is current. That word automatic matters. It means a performing borrower owns the extension by right, not by the lender’s mood in month eleven. By contrast, an extension at the lender’s sole discretion is a very different thing. A loan with no extension language at all is worse still. At maturity, you would be refinancing under pressure. So ask what an extension costs, how long it runs, and whether it is guaranteed.

Loan fees, and where our story comes in

Here is where our caller’s quote fell apart. Points, origination, and loan fees usually describe the same thing. Each is a percentage of the loan amount paid at closing. Two percent on a 700,000 dollar loan is 14,000 dollars. Simple enough.

The problem arises when a term sheet carries more than one percentage based fee. Picture an origination fee in one section and a separate loan fee, lender fee, or commitment fee in another. Sometimes the second fee appears in smaller type near the closing cost estimates. That is exactly how a quote advertising 1.25 points turned out to cost our caller 4.75.

Fortunately, the fix is simple. Total every fee the lender charges and express it as one percentage of the loan amount. Then ask each lender directly: what is the total of all lender fees, in dollars, that I will pay at closing? A lender who is aligned with your success will answer in one sentence.

Document, underwriting, and third party fees

Beyond the percentage based fees, expect some flat charges. These include loan document preparation, an underwriting fee, and the customary title, escrow, and servicing costs. Every real estate closing carries them. They are normal. What you want is disclosure on the term sheet itself, in plain figures. In other words, you should not discover them on the settlement statement. A lender who itemizes a 795 dollar doc fee up front is showing you how they intend to behave for the life of the loan.

Valuation conditions

Many private money loan terms include a broker price opinion or appraisal ordered by the lender and paid by the borrower. This is standard practice. Just understand the sequence. You pay for the valuation before the loan is final. Meanwhile, the loan amount may adjust based on what the valuation says.

Late charges and default interest

Find the late charge, commonly a percentage of the missed payment. Also find the default interest provision. Many loans jump to a much higher rate upon default. Furthermore, lenders can define default more broadly than a missed payment. Read the definition, not just the number. You never plan to see this section in action. That is exactly why you should read it while everything is friendly.

Prepayment and minimum interest

The whole point of bridge financing is a fast exit. Consequently, the prepayment section matters enormously. A 3 month minimum interest requirement with no penalty afterward is among the most borrower friendly structures you will see. It guarantees the lender a modest floor. At the same time, it leaves you free to sell or refinance the moment your project allows. Compare that to a 12 month minimum. If your exit arrives in month seven, you owe five months of interest on money you no longer need. This term is often negotiable. However, you can only negotiate what you notice before you sign.

Are term sheets binding?

The short answer is mostly no. Nearly every term sheet, including ours, states that it is a summary of discussions. It does not constitute an offer, agreement, or commitment to lend. The financing remains subject to due diligence, credit approval, and final documentation. Term sheets also expire if not signed and returned in time. None of this is sinister. After all, no responsible lender can commit capital before underwriting the deal.

However, the short answer is the less important one. The long answer is a question. Do you want to do business with a company that trades terms?

Because a term sheet is not legally binding, only character holds a lender to it. Unfortunately, some lenders use that gap deliberately. They issue an attractive term sheet to win the deal. Then they wait until you have paid for the appraisal, opened escrow, and told your seller you are funded. Finally, they revise the numbers once walking away has become expensive. Technically, they have done nothing wrong. Practically, they have told you exactly who they are.

A term sheet, then, is less a contract than a first look at a lender’s integrity. When you learn how to read a private lender term sheet, you are really learning to evaluate the institution, not just the pricing. Ask the lender how often their final loan documents match their term sheets. Also ask for a reference from a recent borrower. A lender whose terms hold from first page to closing table has given you something no signature can. They have given you a reason to trust the rest of the relationship.

Questions to ask when reviewing any term sheet

Before you sign, sit with the document. Make sure you can answer each of the following.

What is the total of all lender fees, as one percentage of the loan amount and as a dollar figure?

Is interest charged on drawn funds or on the full balance?

Is the loan amount fixed, or the lesser of a dollar figure and a valuation still to come? What happens if the valuation comes in low?

Is the extension automatic for a performing borrower, or discretionary? What does it cost?

Is there a prepayment penalty or minimum interest period? How does it fit my expected exit date?

What is the default interest rate, and how is default defined?

Who is personally guaranteeing the loan?

When does this term sheet expire? How often do your final documents match your term sheets?

If any answer requires a phone call, make the call before you sign. Then pay attention to how readily the answer comes.

Why we wrote this guide

At Mayacamas Lending, we believe a borrower who fully understands their loan is a better borrower. Our terms should read the same on page one as they do at the closing table. The developer who called us that day did not need a cheaper loan. He needed a truthful reading of the one he already had. So if you have a term sheet in hand and want a second set of eyes, reach out. We are glad to walk through it with you, whether or not the loan ends up with us. For related reading, our guides on trust beneficiary buyouts and DSCR loans cover two of the most common paths our borrowers take next.

Mayacamas Lending Inc. is a California private lender originating business purpose bridge, construction, and rental loans. CA DRE #02306252.