DSCR Loan Prepayment Penalties

[Gustavo Alvarez]

Hi there! I applied for a DSCR loan and the terms include vague language indicating they may be a penalty if paying the loan early. Is this common for these types of loans? Is there a typical minimum period where the penalty applies, like 3-5 years? Can this be negotiated?

[Robin Simon]

Quote from @Gustavo Alvarez:

Hi there! I applied for a DSCR loan and the terms include vague language indicating they may be a penalty if paying the loan early. Is this common for these types of loans? Is there a typical minimum period where the penalty applies, like 3-5 years? Can this be negotiated?

Yes - generally prepayment penalties are common on DSCR Loans, but can vary and some DSCR Lenders will have DSCR options with no prepayment penalties (there are also a few states that preclude any prepayment penalties at all, even on investment properties - this includes Alaska, New Mexico, Kansas and some others).

There are two parts to a prepayment penalty - 1) How Long and 2) How Much

1) Generally it will be no more than 5 years for the length (i.e. if you prepay in the first five years of a thirty-year loan you are subject to a fee), but 4 or 3 or 2 or 1 year options are somewhat common. It is very very rare for a DSCR Loan to have a prepayment penalty duration more than 5 years

2) Generally this will range from 5% for the entire period, to a "descending penalty" structure which is very common - such as "5/4/3/2/1" where its 5% first year, 4% second year, 3% third year etc. There is also a prepayment structure that is equal to six months of interest (so half the rate) for about five years - this is more common for west coast DSCR lenders (sometimes called "Cali Style"

Generally OK to negotiate - but with no prepayment penalty, you are likely going to have a significantly higher rate or points at close