DSCR Loan Prepayment Penalties: What They Cost You

Almost every DSCR loan has a prepayment penalty. Here's what you need to know before signing.

The Common Structures

5-4-3-2-1 (Step-Down): Most common. On a $400K loan, selling in year 1 costs you $20,000 (5%). Year 3? $12,000 (3%). It drops each year.

3-2-1: Shorter penalty period. You're free after 3 years. Expect a slightly higher rate — usually 0.125-0.25% more.

Flat 3-Year or 5-Year: Same percentage regardless of when you pay off. Less common but watch for it.

What It Actually Costs

| Loan Amount | Year 1 (5%) | Year 3 (3%) | Year 5 (1%) |
|------------|-------------|-------------|-------------|
| $300K | $15,000 | $9,000 | $3,000 |
| $500K | $25,000 | $15,000 | $5,000 |
| $750K | $37,500 | $22,500 | $7,500 |

When the Penalty Actually Saves You Money

Accepting a prepayment penalty typically drops your rate by 0.25-0.50%. On a $500K loan, that's $1,250-$2,500/year in savings. If you're holding 5+ years, the lower rate more than offsets the penalty risk.

When to Negotiate It Down

• Short-term hold (flip or BRRRR): Push for a 3-2-1 or no-PPP option
  - Multiple properties: Lenders will negotiate on volume
  - Strong DSCR ratio (1.4+): You have leverage — use it

Bottom Line

Don't fear prepayment penalties — understand them. If you're buying and holding, they're usually worth the rate discount. If you're planning to refi in 18 months, pay the higher rate and skip the penalty.

Questions about your specific deal? Get a quote →

Bill McCoy | Better Offers Inc | CA DRE #01902006