How to read a DSCR term sheet for an LA or Inland Empire rental

Start with what the loan is

Every term sheet begins with a description of the product, and it is worth reading slowly. Look for the term of the loan, whether it is fixed or adjustable, how long the fixed period lasts, how the payment is calculated, and whether interest-only is available or included. Those five facts determine the monthly obligation before any rate is applied.

An adjustable loan with a fixed period of several years is a different instrument from a fixed loan of the same length, and a loan with a forty-year amortization is a different instrument from a thirty-year loan even when both are fixed. The ratio a lender quotes is calculated against a specific payment structure. If the structure is not the one you expected, the ratio is not the one you need.

Find the rent assumption

Somewhere in the document there is a sentence describing how qualifying rent is determined. It may say the lesser of the lease rent and the appraiser’s market rent. It may allow the appraiser’s figure alone. It may apply a vacancy factor, or a market-rent form in which the lower of two methods is used.

This sentence is the single most important line for an LA or Inland Empire file. A property with a below-market lease inherited from a long-term owner — common in rent-stabilized Los Angeles buildings — can qualify on one method and fail on another. If the assumption is not stated, ask for it in writing before you compare anything else.

Ask which rent figure was used in the ratio you were quoted. If the answer is vague, the quote is not comparable to any other.

Leverage and loan amount

Look for the maximum loan-to-value, the maximum loan amount, and any minimum. Lenders often publish a maximum leverage that applies only to the strongest scenarios, with lower leverage for cash-out, for certain property types, or for higher loan amounts. The number that matters is the one that applies to your file, not the headline maximum.

Also check the interaction between leverage and ratio. Some programs allow higher leverage at a higher coverage ratio, which means a buyer could put more down and still end up with a smaller loan than expected if the rent does not support the amount.

The prepayment section

Investor loans frequently carry a prepayment charge for a defined period, because the lender priced the loan assuming it would stay outstanding. The structure varies: a declining charge that falls each year, a fixed charge for a set period, a yield-maintenance calculation, or in some cases no charge at all.

Whatever the form, translate it into a dollar amount for the exit you actually plan. If you intend to sell in three years, what is the charge at month thirty-six? If you intend to refinance when pricing changes, what does that cost? A loan with a slightly higher rate and no prepayment charge can be cheaper than a loan with a lower rate and a heavy exit cost.

• Length of the prepayment period, measured from closing
• How the charge is calculated and whether it declines
• Whether a sale of the property triggers the same charge as a refinance
• Whether partial payoffs are treated differently from full payoffs
• Whether the charge can be waived on a rate-and-term refinance with the same lender

Fees, in dollars

A term sheet may express lender charges as points or as a flat fee, and it will usually list third-party costs as estimates. Convert everything into dollars at your loan amount, then add the third-party items you will actually pay: appraisal, title and escrow, recording, and any county or city transfer tax that applies.

Two offers that look close on rate can differ by thousands of dollars in cost, and the cheaper one at closing may not be the cheaper one over the holding period. Points are a prepaid cost; a higher rate is a monthly one. The right comparison depends on how long you hold, which is why the prepayment section and the fee section belong together.

Conditions are the map of what can still go wrong

The conditions section lists what the lender needs before it will draw documents. Read it as a list of risks rather than paperwork. A condition requiring an insurance binder from an admitted carrier tells you the lender knows insurance is an issue — a live one in Inland Empire foothill communities. A condition requiring entity documents and a guaranty tells you how title has to be held.

Anything you cannot satisfy quickly is a reason to talk before paying for an appraisal. Files that fall apart late usually do so because a condition surfaced that could have been identified on day one, not because the borrower changed their mind.

Comparing two offers without being fooled

Put three columns side by side: structure, cost, and exit. Under structure, list term, fixed period, amortization, interest-only availability, leverage and the ratio assumption. Under cost, list every fee in dollars plus the monthly payment at the same loan amount. Under exit, list the prepayment terms and the conditions that would allow a sale or refinance.

Then ask one question of each column: what would have to be true for this to be the better offer? The answer usually names the assumption you should test with an appraisal, a lease or an insurance quote before you commit.