Issuing a term sheet at the start of the loan process helps facilitate a smoother, more transparent, and efficient loan origination process. It’s a professional move that can avoid headaches. Let’s delve into what a term sheet is, the benefits of issuing one early, and what goes into producing one.
What is a Term Sheet?
A term sheet is a non-binding document that outlines the basic terms and conditions under which a loan will be made. It serves as a preliminary agreement that sets the framework for the final, binding contract. Some of the key elements typically included in a term sheet for private or hard money real estate loans are:
- Loan Amount: The total amount to be borrowed.
- Holdback: Funds that will be held in escrow for rehab or construction, if any.
- Interest Rate: The rate at which interest will be charged.
- Loan Term: The duration of the loan.
- Repayment Schedule: How and when the loan will be repaid.
- Collateral: Details of the property or asset used as security for the loan.
- Fees and Costs: Any associated costs, such as origination, underwriting, or inspection fees.
- Prepayment Penalties: Any penalties for early repayment.
- Other Key Terms and Provisions
Benefits of Issuing a Term Sheet
A term sheet provides a clear summary of the key terms and conditions, ensuring that both parties have a mutual understanding before moving forward. By outlining the main terms upfront, a term sheet can save time and reduce legal costs, as it helps identify any deal-breaking issues early in the process. A well-prepared term sheet can build confidence and trust between the lender and the borrower, as it demonstrates a clear and organized approach to the loan agreement.
Using a Sizer and Pricing Matrix to Produce a Term Sheet
A sizer and pricing matrix work together to determine the appropriate size, structure, and pricing of the loan. Using these tools to produce terms ensures a consistent and systematic way to determine the terms of a loan. Here’s how they contribute to producing a comprehensive term sheet:
- Loan Amount Calculation: The sizer helps calculate the maximum loan amount based on the property’s cost or value and the desired Loan-to-Value (LTV) ratio. Most private lenders use a maximum As-Is LTV or Cost and the maximum After-Repair LTV, whichever results in a lower loan amount. For DSCR loans, the sizer will consider the Net Operating Income (NOI) of the property to determine the minimum DSCR, and calculate the maximum loan amount accordingly.
- Interest Rate Determination: The pricing matrix adjusts interest rates based on borrower risk factors, property characteristics, and loan size. It categorizes loans into different risk tiers with predefined pricing terms.
- Fee Calculation: The pricing matrix determines fees for processing and originating the loan, as well as additional third party costs associated with the origination process.
How can Baseline help?
Baseline provides comprehensive tools and features that streamline the loan origination process. Here’s how Baseline can assist lenders in creating and managing term sheets efficiently.
- Automated Term Sheet Generation: Baseline can automatically generate term sheets based on inputted data, reducing the time and effort required to draft these documents manually.
- Advanced Sizer Integration: Users can use advanced excel-based sizers to calculate the appropriate loan amount based on each lender’s proprietary criteria.
- Comprehensive Pricing Matrix: Baseline incorporates a robust pricing matrix that adjusts interest rates and fees based on various risk factors.
- Streamlined Communication: Baseline ensures that all parties have a clear understanding of the loan terms by providing detailed and transparent term sheets that can be shared with borrowers digitally and directly through the platform.
- No double entry: Baseline allows lenders to easily convert a term sheet into a loan or update the terms of an existing loan with just a couple of clicks through its intuitive interface.
Learn More
Want to make your loan origination process smoother, more transparent, professional, and efficient? Baseline can help. Automating the generation of term sheets is just one of the ways Baseline empowers lenders to create a well-structured and competitive lending operation.
Reach out today for a demo.