Dramatic faith is the ability of an actor to accept his fictional surroundings and situations as truth, in order to better adapt to his character.
At its base level, all acting is fiction, and it requires some degree of dramatic faith to pull off a role. However, it's obvious that in some instances more faith is required than others. The most obvious example would be in today's CGI-infested world. An actor must often work with characters and scenery onscreen that he cannot see while he is filming the scene. However, he must maintain not only that he can see what is not there, but must react to it appropriately and without regard for the real situation he is in - surrounded by blue carpet and cameras.
Other examples of dramatic faith would be when an improv team must take on roles that require set pieces or additional scenery that is unavailable. Pretending like you're in a jungle while sitting on a small stage in Peoria can be difficult. Hence, dramatic faith is not always an easy thing, but at worst, the lack of faith can be used as a tool itself, a sort of building block for the other actors.
Dramatic faith is an important subset of both method acting and internal acting (wherein each actor works the hardest to bring his or her character to his or her role, so that only characters appear and never actors.)