Rates & Terms

Do DSCR Loans Have Prepayment Penalties?

Last updated: November 18, 2025by LoanGuys.com Team

Yes — most DSCR (Debt Service Coverage Ratio) loans include a prepayment penalty, but the structure and duration can vary depending on the lender and loan program.
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These penalties are standard for investor loans because they’re designed for long-term income generation rather than short-term speculation.

💡 What Is a Prepayment Penalty?

A prepayment penalty is a fee charged if you pay off your loan earlier than the agreed term — either by selling, refinancing, or paying the balance in full before the penalty period expires.

This compensates the lender for lost interest revenue when a loan is repaid too soon.

📅 Typical Prepayment Penalty Structures

Penalty Type

Description

Common Term

5-Year Step-Down

The most common structure; penalty decreases each year

5%, 4%, 3%, 2%, 1%

3-Year Step-Down

Shorter term with faster flexibility

3%, 2%, 1%

Fixed Penalty

Flat rate applied during the entire penalty period

3–5%

No Prepay Option

Higher rate in exchange for no penalty

Rate increase of ~0.25%–0.50%

This is an information.

The step-down penalty means the fee reduces each year — for example, paying off in year 3 would cost 3% of the remaining loan balance.

🧮 Example Scenario

If you have a $400,000 DSCR loan with a 5-4-3-2-1 step-down penalty, and you refinance in year 2:

$400,000 × 0.04 = $16,000 prepayment penalty

The penalty drops each year, eventually reaching zero after the term ends.

⚙️ Why Lenders Use Prepayment Penalties

  • DSCR loans are often securitized (bundled and sold to investors). Early payoffs disrupt returns on those investments.

  • They help lenders offer lower starting rates by ensuring the loan stays active for a minimum period.

  • They encourage stability in long-term rental portfolios.

🧠 Pro Tips for Investors

  • If you plan to flip or refinance quickly, ask for a 3-year or no-prepay option — even if the rate is slightly higher.

  • Always confirm whether your penalty applies to sales, refinances, or both.

  • Some lenders waive penalties for rate-and-term refinances after year two.

  • Keep your loan term aligned with your investment exit strategy to avoid surprises.

💬 Summary

Prepayment penalties are standard in DSCR lending but entirely manageable when planned correctly.

Choosing the right structure ensures you keep your flexibility while still enjoying competitive rates and smooth underwriting.

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