Prepayment penalties exist because DSCR loans are priced based on expected loan duration and lenders and investors need stability on the loan. In return, you typically get: Better rates, More flexible qualification, Higher leverage options.

Yes—but there’s a trade-off. You can structure loans with: Reduced prepay or No prepay. But that usually means: Higher rate, Higher cost, Less favorable terms. You’re not avoiding cost—you’re just shifting it.

Prepayment Penalties on DSCR Loans: What Investors Need to Know

Bear VII Equities
Apr 29
2 min read

Prepayment penalties come up on almost every DSCR loan.

And most of the time, they’re misunderstood.

Some investors avoid them completely. Others ignore them.

Neither approach is right.

If you’re using DSCR financing, you need to understand how prepayment penalties actually work—and when they matter.

What a Prepayment Penalty Is

A prepayment penalty is a fee charged if you pay off or refinance the loan early.

Most DSCR loans come with a structure like:

3-year
5-year

Often shown as:

3-2-1
5-4-3-2-1

That means the penalty decreases over time.

Example (3-2-1):

Year 1 → 3%
Year 2 → 2%
Year 3 → 1%

After that, no penalty.

Why They Exist

Prepayment penalties aren’t there to hurt you.

They exist because:

DSCR loans are priced based on expected loan duration
Lenders and investors need stability on the loan

In return, you typically get:

Better rates
More flexible qualification
Higher leverage options

Where It Gets More Complicated (State Rules)

This is something most investors don’t realize:

Prepayment penalties are not treated the same in every state.

Depending on the state:

Some allow full prepayment structures with no restrictions
Some require specific disclosures
Some only allow them if the borrower is vested in an entity (LLC)
Some limit the penalty term or percentage
And a few states don’t allow them at all

There are also states where interpretation varies depending on the lender.

What this means in practice:

The same deal can be structured differently depending on the state and lender.

This is where a lot of confusion—and mistakes—happen.

When Prepayment Penalties Matter

They matter if:

You plan to refinance quickly
You plan to sell within a short timeframe
You’re doing a short-term hold

They matter less if:

You’re holding long-term
You’re focused on cash flow
You’re not planning to exit early

Can You Avoid Them?

Yes—but there’s a trade-off.

You can structure loans with:

Reduced prepay
Or no prepay

But that usually means:

Higher rate
Higher cost
Less favorable terms

You’re not avoiding cost—you’re just shifting it.

What Most Investors Get Wrong

They either:

Avoid prepayment completely and overpay on rate
Or ignore it and get hit when exiting early

The better approach is:Structure the loan around your actual exit strategy.

How I Approach It

I don’t treat prepayment penalties as good or bad.

I look at:

The borrower’s timeline
The property strategy
The state the property is in
And which lender fits best

Then structure the loan accordingly.

Final Thought

Prepayment penalties are just another piece of the deal.

When they’re structured correctly, they’re not a problem.

When they’re ignored, they can get expensive.

Next Step

If you’re looking at a DSCR loan and want help structuring it around your hold period and state guidelines, submit your deal below and I’ll take a look.

Submit Your Scenario

Or feel free to reach out directly:

Email: nick@bearviiequities.com