DSCR Guide
Are There Prepayment Penalties on DSCR Loans?
Yes — many DSCR loans include prepayment penalties. Investors accept PPP in exchange for better rates — and plan exits and refinances around the window.
Why DSCR Loans Use Prepayment Penalties
Prepayment penalties (PPP) compensate investors when loans pay off early — before they earn expected yield. On DSCR, accepting a PPP often improves your rate, which is why most investors include them by default.
Common structures run 3–5 years with declining percentages — such as 5-4-3-2-1 or 3-2-1. Soft vs. hard prepay rules determine whether selling without penalty is allowed while refinancing still triggers a fee.
PPP terms are investor-specific — confirm exact language before you lock.
Prepay Snapshot
Common Prepay Structures
Know the schedule before you plan a sale or refinance.
Planning Exits Around Prepay
Match PPP length to how long you realistically hold the asset.
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Example: Refinance vs. Prepay Cost
An Indiana investor in year two of a 5-4-3-2-1 PPP faces a 4% penalty on the remaining balance to refinance early. If the new rate saves $200/month, we calculate how many months of savings it takes to break even against the penalty — and whether waiting one more year is smarter.
Never assume PPP language is identical across investors. We confirm soft vs. hard and sale exceptions before you lock.
Quick checklist before you lock
- 1. Confirm PPP length and declining schedule
- 2. Ask soft vs. hard and sale exceptions
- 3. Compare rate at different PPP options
- 4. Map your realistic hold or refinance timeline
- 5. Read partial paydown rules in the note
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Frequently Asked Questions
Are there prepayment penalties on DSCR loans?
Yes — many DSCR loans include prepayment penalties (PPP). Common structures run 3–5 years with declining percentages (such as 5-4-3-2-1 or 3-2-1). PPP length often trades off against rate.
When does prepayment penalty trigger?
Typically when you pay off, refinance, or sell within the PPP window — depending on soft vs. hard structure. Partial paydowns above a threshold can also trigger on some programs.
Should I choose a shorter or longer PPP?
Longer PPP usually improves rate — good if you plan to hold. Shorter PPP costs more in rate but preserves flexibility if you expect to sell or refinance soon.
Planning an Exit Around Prepay Terms?
Ryan & Steve will compare PPP options against rate and map your hold or refinance timeline before you lock.