Refinance & Exit Math
DSCR Loan Prepayment Penalty Explained: 5-4-3-2-1, 3-2-1, Soft vs. Hard & State Rules
A plain-English architectural breakdown of how prepayment penalties work on business-purpose DSCR loans: step-down versus level schedules, exact dollar payoff math on $300,000 and $500,000 balances, cited state statutes, and the questions to get answered in writing before you pay for an appraisal.
Quick answer: How does a DSCR loan prepayment penalty work?
A DSCR prepayment penalty is a contractual fee charged if you pay off all—or more than a permitted share—of your investment loan balance within an initial window, typically 1 to 5 years. Common structures include 5-4-3-2-1 and 3-2-1 step-downs, 6 months of interest on 80 percent of the balance, or 0-year no-penalty options, subject to state statutory rules.
What is a DSCR loan prepayment penalty, and why do business-purpose loans have one?
Direct answer: A prepayment penalty (PPP) is a clause in a business-purpose promissory note that charges a percentage of the unpaid loan balance—or a specified number of months of interest—if the borrower pays off the mortgage early through a sale, refinance, or large principal curtailment during the agreed lock-in period.
Landlords transitioning from conventional Fannie Mae or Freddie Mac investment mortgages are often surprised to see prepayment riders on DSCR loans. On consumer mortgages, federal Truth in Lending / Dodd-Frank rules generally ban or tightly cap prepayment penalties. By contrast, DSCR loans are strictly business-purpose loans on non-owner-occupied investment properties, which are exempt from federal consumer prepayment prohibitions.
In the wholesale non-QM and commercial-residential capital markets, institutional bond buyers purchase pools of DSCR loans expecting several years of steady monthly coupon income. If a borrower pays off a loan six months after closing, the capital market investor loses the multi-year cash flow stream that paid for the loan’s origination premium. Consequently, wholesale lenders use the prepayment period as a primary structural lever:
- Longer Prepayment Window (e.g., 5 Years): Gives the secondary market investor more duration certainty, which generally unlocks the most favorable wholesale program terms and helps maximize the property’s qualifying DSCR ratio.
- Shorter or Zero Prepayment Window (e.g., 2-Year, 1-Year, or No Penalty): Gives you, the landlord, freedom to sell or refinance early without a payoff fee, in exchange for a more conservative wholesale pricing grid.
- Broker Advantage: Because Loan Daddy LLC is a mortgage broker and not a lender, we compare prepayment grids across dozens of wholesale shelves so you can see the exact trade-off between a 5-year, 3-year, 1-year, and 0-year rider on your property.
How do 5-4-3-2-1, 3-2-1, fixed, 6-months-interest, and no-penalty structures work?
Direct answer: Wholesale DSCR lenders offer five main prepayment formulas: declining step-downs (5-4-3-2-1, 3-2-1, 2-1), level fixed tiers (3-3-3 or 5-5-5-5-5), 1-year-only riders, 6 months of interest on 80 percent of the prepaid balance, and no-penalty (0-year) structures. Each formula calculates your early payoff cost differently across Years 1 through 5.
Before signing a term sheet—or before ordering a payoff demand to refinance an existing DSCR loan—use the comparison table below to see how each structure behaves on a hypothetical $300,000 and $500,000 unpaid principal balance. (All figures below are pure percentages of loan balance for educational illustration; no interest rates are assumed or quoted.)
| Prepayment Structure | Annual Penalty Schedule | Dollar Cost on $300,000 Balance | Dollar Cost on $500,000 Balance | Typical Investor Fit |
|---|---|---|---|---|
| 5-4-3-2-1 Step-Down (5-Year) | Year 1: 5 percent · Year 2: 4 percent · Year 3: 3 percent · Year 4: 2 percent · Year 5: 1 percent · Year 6+: $0 | Yr 1: $15,000 · Yr 2: $12,000 · Yr 3: $9,000 · Yr 4: $6,000 · Yr 5: $3,000 · Yr 6+: $0 | Yr 1: $25,000 · Yr 2: $20,000 · Yr 3: $15,000 · Yr 4: $10,000 · Yr 5: $5,000 · Yr 6+: $0 | Long-term buy-and-hold landlords planning to hold the rental and debt structure for 5+ years. |
| 3-2-1 Step-Down (3-Year) | Year 1: 3 percent · Year 2: 2 percent · Year 3: 1 percent · Year 4+: $0 | Yr 1: $9,000 · Yr 2: $6,000 · Yr 3: $3,000 · Yr 4+: $0 | Yr 1: $15,000 · Yr 2: $10,000 · Yr 3: $5,000 · Yr 4+: $0 | Balanced default for most 1-4 unit investors who want flexibility to refinance or sell after 24 to 36 months. |
| 2-1 Step-Down (2-Year) | Year 1: 2 percent · Year 2: 1 percent · Year 3+: $0 | Yr 1: $6,000 · Yr 2: $3,000 · Yr 3+: $0 | Yr 1: $10,000 · Yr 2: $5,000 · Yr 3+: $0 | Investors stabilizing rents or completing light cosmetic upgrades before a planned medium-term refinance. |
| 1-Year Only (1-0) | Year 1: 1 percent (or 2 percent to 3 percent on selected shelves) · Year 2+: $0 | Yr 1: $3,000 (at 1 percent) · Yr 2+: $0 | Yr 1: $5,000 (at 1 percent) · Yr 2+: $0 | Transitional rentals where the borrower expects to sell, execute a 1031 exchange, or refinance after 12 months. |
| Fixed / Level (3-3-3 or 5-5-5-5-5) | Flat 3 percent or 5 percent of unpaid principal balance in every year of the penalty window | 3-3-3: $9,000 in Yr 1, Yr 2, or Yr 3 · 5-5-5-5-5: $15,000 in Yrs 1–5 | 3-3-3: $15,000 in Yr 1, Yr 2, or Yr 3 · 5-5-5-5-5: $25,000 in Yrs 1–5 | High-certainty hold periods where the investor is confident no sale or cash-out refinance will occur during the window. |
| Six Months of Interest on 80 Percent of Prepaid Balance | Typically 6 months of interest calculated on the amount prepaid above 20 percent of the original principal balance per year | Applies to 80 percent of balance ($240,000) if paid in full during the penalty window; allows 20 percent annual curtailment penalty-free | Applies to 80 percent of balance ($400,000) if paid in full during the penalty window; allows 20 percent annual curtailment penalty-free | Borrowers who want the right to pay down up to 20 percent of principal each year without triggering a fee. |
| No Prepayment Penalty (0-Year / Open) | Zero prepayment fee from day one | $0 in all years | $0 in all years | Short-horizon repositions, imminent property sales, or properties in states where statutory rules bar penalties on the loan tier. |
Illustrative dollar math shows penalty as a share of unpaid principal balance at the time of full payoff. Actual payoff calculations depend on the specific Prepayment Note Addendum in your loan file.
What is the difference between a soft and a hard prepayment penalty on a DSCR loan?
Direct answer: A hard prepayment penalty charges the early payoff fee regardless of how you pay off the loan—whether you refinance into a new mortgage or sell the property. A soft prepayment penalty charges the fee if you refinance during the penalty window, but waives the fee if you sell the property in an arm’s-length transaction.
Investors who also borrow in the commercial bank or agency multifamily world often assume their DSCR prepayment rider is "soft" on a sale unless told otherwise. In the wholesale 1–4 unit DSCR market, the opposite is true:
- Hard Prepayment Penalty (Industry Standard on 1–4 Unit DSCR): Unless a soft rider is explicitly selected and priced into the lock, almost all wholesale 1–4 unit DSCR step-down and 6-month-interest riders are hard penalties. Payoff via refinance, payoff via cash, or payoff at the closing table of a property sale during the active penalty window all trigger the fee.
- Soft Prepayment Penalty (Available on Selected Shelves): A soft rider protects an investor who might sell the property if local appreciation surges, while still protecting the lender against an early rate-and-term or cash-out refinance. To qualify for the sale waiver, the sale must be a bona fide arm’s-length transfer to an unrelated third party—transferring title to an affiliated LLC or family member does not waive the penalty.
- Yield Maintenance & Defeasance (5+ Unit & Commercial Shelves): On small multifamily loans (5+ units) or blanket portfolio loans, some commercial shelves use yield maintenance (a present-value formula tied to U.S. Treasury yields) instead of simple fixed step-downs. Always ask your broker to keep your loan on a simple step-down rider when comparing 5–10 unit options.
How much does a DSCR prepayment penalty cost in dollars when you refinance or sell?
Direct answer: You calculate your exact exit cost by checking the origination date on your Promissory Note, identifying which 12-month anniversary year you are currently in, and multiplying your current unpaid principal balance by that year’s penalty percentage (or applying the 80 percent curtailment formula if your rider uses six months of interest).
Below are three concrete worked examples showing how landlords evaluate prepayment math in real dollars without relying on interest-rate guesses. You can also read our companion primer on prepayment structures on DSCR loans.
Worked Example 1 · Refinancing in Month 26 on a 3-2-1 Step-Down vs. a 3-3-3 Level Rider
Scenario: An investor holds a DSCR loan with an unpaid principal balance of $360,000. The loan closed 26 months ago, placing the loan two months into Year 3 (Months 25 through 36). The property has appreciated after a renovation, and the investor wants to execute a DSCR cash-out refinance to pull $75,000 in equity for another acquisition.
- If the Note has a 3-2-1 Step-Down Rider: Year 3 penalty is 1 percent of the unpaid balance →
$360,000 × 0.01 = $3,600. The $3,600 payoff fee is added to the payoff demand and paid out of the new refinance proceeds, leaving $71,400 in net capital before standard closing costs. - If the Note has a 3-3-3 Fixed (Level) Rider: Year 3 penalty is still 3 percent of the unpaid balance →
$360,000 × 0.03 = $10,800—an extra $7,200 in exit cost simply because the rider did not step down in Years 2 and 3. - Decision Insight: If the loan is in Month 34 of a 3-3-3 rider, waiting 60 days until Month 37 drops the penalty from $10,800 to $0. You can start underwriting and appraisal work in Month 35 and schedule closing for Day 1 of Month 37.
Worked Example 2 · Using the 20 Percent Annual Curtailment Window Before a Full Payoff
Scenario: A landlord has a $450,000 original loan balance (currently paid down to $440,000 in Year 2) with a Prepayment Addendum that charges a 2 percent penalty only on principal prepayments exceeding 20 percent of the original loan amount in any 12-month period.
- Penalty-Free Annual Curtailment Allowance: 20 percent of $450,000 original principal = $90,000.
- Balance Subject to the Year 2 Penalty (2 percent):
$440,000 current balance − $90,000 free allowance = $350,000. - Calculated Prepayment Fee:
$350,000 × 0.02 = $7,000(instead of $8,800 on the full $440,000 balance—saving $1,800).
Worked Example 3 · Exiting a Hard Money Bridge Loan Into a DSCR Refinance
Scenario: An investor used a 12-month bridge loan with a $280,000 balance to buy and rehab a triplex. The bridge note has a 3-month minimum interest / exit fee window that has already expired at Month 5. Now the investor is choosing a prepayment structure on the new $340,000 permanent DSCR refinance (hard money exit).
- Plan A (Keep the Triplex 5+ Years): Choosing a 5-4-3-2-1 or 3-2-1 rider maximizes qualifying DSCR head-room because the investor has already completed the value-add rehab and does not need to refinance again soon.
- Plan B (Sell Within 18 Months After Seasoned Rent Roll): Choosing a 1-year (1-0) rider or a 0-year no-penalty rider avoids paying a $10,200 to $13,600 payoff fee (3 percent to 4 percent of $340,000) when listing the property in Year 2.
Which states restrict or cap prepayment penalties on DSCR and 1–4 unit loans?
Direct answer: Several U.S. states enact statutory limits on mortgage prepayment penalties for 1–4 unit residential dwellings. State limits often depend on owner-occupancy, unit count, loan amount, loan purpose and lender type; several states exempt business-purpose or entity borrowers only from interest-rate caps, not prepayment rules. Below are the specific state statutes you can verify directly on official state legislature websites; in all other jurisdictions, rules vary by state.
Because state lending statutes distinguish between consumer mortgages, natural-person investment loans, corporate/LLC loans, unit counts (1–2 units vs. 3–4 units), and loan dollar thresholds, wholesale DSCR lenders apply state-specific matrices. The table below cites the primary statutory provisions in seven frequently encountered jurisdictions with direct links to the official state code or legislature source:
| State | Cited Statute / Regulator Source | How the Statutory Rule Operates |
|---|---|---|
| Ohio | Ohio Rev. Code § 1343.011(C); see also § 1343.01 ↗ Related source ↗ | Ohio Rev. Code 1343.011(C) applies to 'residential mortgages' — loans secured by Ohio real property with two or fewer residential units (1343.011(A)(2)). Prepayment may be charged only during the first five years and may not exceed 1% of the original principal; none after five years. No prepayment penalty at all may be charged on a first-lien residential mortgage under $75,000 (CPI-adjusted annually) made or arranged by a mortgage broker, loan officer or nonbank lender (1343.011(C)(2)). The statute contains no business-purpose or entity exception; 3–4 unit properties fall outside the definition. ORC 1343.01(B)(6) is a business-loan exemption from Ohio's interest-rate ceiling only, not from 1343.011. |
| Minnesota | Minn. Stat. § 58.137, Subd. 2 & Subd. 4 (Laws 2026, ch. 58) ↗ Related source ↗ | Minn. Stat. 58.137, subd. 2 limits prepayment penalties on prime residential mortgage loans (no penalty on partial prepayment, on sale, or after 42 months; cap = lesser of 2% of unpaid principal or 60 days' interest), and bars any prepayment penalty on loans whose APR exceeds set Treasury spreads (subd. 2(c)); loans above the conforming limit are excluded (subd. 2(d)). Minnesota's definition covers 1–4 unit property whether or not owner-occupied (58.02, subd. 21). Effective Aug. 1, 2026 (Laws 2026, ch. 58), new subd. 4 provides that subds. 1 and 2 do not apply to a purchase-money, first-lien or DSCR loan (as defined in 58.20, subd. 5a) when the loan is for investment purposes only, no borrower, guarantor or cosigner occupies or intends to occupy the property, and the seller does not stay in occupancy. Loans executed before Aug. 1, 2026 remain subject to subd. 2. |
| Pennsylvania | 41 P.S. § 405 & § 101 (Act 6 of 1974 — Loan Interest and Protection Law) ↗ | Act 6, § 405 (41 P.S. § 405): residential mortgage obligations may be prepaid without penalty. 'Residential mortgage' (§ 101) = original principal at or below the annually adjusted 'base figure' secured by PA real property with two or fewer residential units. § 101 also defines a 'residential mortgage debtor' as a non-corporate borrower. Loans above the base figure, or on 3–4 unit property, are outside § 405. Section 301(f) exempts business loans and above-base-figure loans from Act 6's interest-rate ceiling; whether § 405 reaches a business-purpose loan at or below the base figure is a question for counsel. Check the PA Department of Banking and Securities' current base figure. |
| Alaska | Alaska Stat. § 45.45.010(g) ↗ | Alaska Stat. 45.45.010(g): “Loan contracts and commitments covering one- to four-family dwellings may be prepaid without penalty, except federally insured loans that require a prepayment penalty.” No business-purpose, investment or entity exception appears in the statute; whether it applies to DSCR loans (and federal preemption for federally chartered lenders) is a question for counsel. |
| Illinois | 815 ILCS 205/4(2)(a), 4(1)(a) & 4(1)(c) (Illinois Interest Act) ↗ | 815 ILCS 205/4(2)(a): if the interest rate exceeds 8% APR on a loan secured by a mortgage on residential real estate, a prepayment penalty is unlawful. Section 4(2) does not apply to loans listed in 4(1)(a) (any loan to a corporation) or 4(1)(c) (business loans to a business association, partnership, sole proprietor, joint venturers, limited partnership or business trustee; 'business' includes an enterprise carried on for investment or profit but not real estate occupied solely as the obligor's residence). Section 4(1)(c) does not name limited liability companies; LLC treatment should be confirmed with counsel. (The 8% figure is the statutory trigger, not a Loan Daddy LLC rate.) |
| Maryland | Md. Code, Com. Law § 12-105(d), § 12-105(c)(4) & § 12-103(e); Fin. Inst. § 11-501 ↗ Related source ↗ Related source ↗ | Com. Law 12-105(d) bars prepayment penalties on a 'mortgage loan' as defined in Fin. Inst. 11-501 — a loan primarily for personal, family or household use secured by a dwelling. Business-purpose investment loans are outside that definition. Com. Law 12-105(c)(4) separately permits a prepayment charge on loans secured by a home (or home-and-business property) only within 3 years and capped at 2 months' advance interest on prepayments exceeding one-third of the original amount in any 12 months; whether (c)(4) limits a business-purpose loan secured by a 1–4 unit rental is a question for counsel. Com. Law 12-103(e) lets lenders charge any interest rate on loans to corporations and on commercial loans over $75,000 secured by residential real property — it is a usury exemption, not a prepayment exemption. (For 12-103(e), 'residential real property' means owner-occupied 1–4 family property.) |
| Iowa | Iowa Code § 535.9; see also § 535.2(2)(a)(4)–(5) ↗ Related source ↗ | Iowa Code 535.9 bars prepayment penalties on loans used to purchase a single-family or two-family dwelling occupied or to be occupied by the borrower (including refinancing of such loans), and on loans of five years or less to buy agricultural land. A non-owner-occupied DSCR loan generally falls outside 535.9. Section 535.2(2)(a)(5) (business/investment-purpose borrowers) and (a)(4) (corporations) are exemptions from Iowa's usury limits. |
Loans made by national banks, federal savings associations and some other federally chartered lenders may be governed by federal law rather than these state rules.
Legal notice (information current as of October 21, 2026): This page is general educational information, not legal, tax or financial advice. Statutes, regulations, local ordinances and their interpretation change, and the summaries above may not reflect later amendments or court and regulator interpretations. Whether a state prepayment rule applies to your loan depends on the property, occupancy, number of units, loan amount, loan purpose, borrower type and the lender's charter and program. Loan Daddy LLC is a mortgage broker, not a lender; we do not make loans or set loan terms, and all terms, including any prepayment provision, are set by the lender and depend on the loan. Before you sign, ask the lender for the exact prepayment terms in writing and consult a licensed attorney in your state. NMLS #2827624 · AZ CMB-2016143 · Equal Housing Opportunity. See our licensing page.
How should you choose a prepayment penalty structure based on your hold period?
Direct answer: Match the length of the prepayment window to your realistic property business plan—not your most optimistic hold assumption. Never accept a 5-year penalty on a property you might sell, 1031 exchange, or cash-out refinance within 24 to 36 months unless you have modeled the dollar exit cost in advance.
Use this hold-period matrix as a list of questions to consider before locking your loan. The structures shown are illustrative only, not a recommendation; the right choice depends on your plan and the lender's terms:
| Planned Hold Period & Strategy | Structure to Ask About (Illustrative Only) | Why This Structure Fits | Exit Risk to Watch |
|---|---|---|---|
| Under 18 Months (Fix-to-Sell, 1031 Reposition, or Rapid BRRRR) | No Prepayment Penalty (0-Year) or 1-Year Only (1-0) | Preserves full exit optionality so you do not forfeit 3 percent to 5 percent of loan principal when selling or executing a post-renovation cash-out refinance. | Zero-penalty shelves require stronger initial coverage or slightly lower leverage; compare the up-front structure against the dollar fee you would pay at month 12. |
| 2 to 3 Years (Value-Add Lease-Up or Mid-Term Portfolio Rebalance) | 2-1 Step-Down or 3-2-1 Step-Down (or Soft PPP if planning to sell, not refinance) | Balances wholesale program access with a rapidly declining exit fee that reaches 1 percent in year three and drops to zero in year four. | Verify whether the rider is a declining step-down (3-2-1) rather than a flat level penalty (3-3-3), which charges 3 percent even in month 35. |
| 4 to 5+ Years (Stabilized Long-Term Buy-and-Hold Cash Flow) | 5-4-3-2-1 Step-Down or 6-Months-Interest on 80 Percent Balance | Provides the widest wholesale DSCR shelf selection and allows up to 20 percent annual principal curtailment on 6-month-interest riders. | If unexpected capital needs or market shifts force a cash-out refinance in years 1 or 2, a 4 percent to 5 percent payoff fee will reduce net proceeds. |
Want to see how different monthly payment assumptions affect your property’s coverage ratio while you weigh these options? Test your numbers in our DSCR refinance calculator or compare interest-only DSCR loans and rate-and-term vs. cash-out refinances.
What prepayment penalty questions should you get in writing before paying for an appraisal?
Direct answer: Before paying $550 to $900+ for an investment property appraisal, ask your mortgage broker or lender to confirm seven specific prepayment terms in writing: the exact year-by-year schedule, step-down versus fixed formula, hard versus soft trigger, annual curtailment allowance, state statutory adjustments, any entity (LLC) requirement, and lock-in start date.
Copy or bookmark this 7-step pre-appraisal checklist for every DSCR acquisition or refinance:
- Is the schedule a declining step-down or a level fixed percentage? Confirm in writing whether a "3-year prepayment penalty" means 3-2-1 (declining to 1 percent in Year 3) or 3-3-3 (flat 3 percent in all three years).
- How is each year’s fee calculated—percentage of balance or months of interest? Know whether the rider multiplies the unpaid balance by a fixed percentage (e.g., 3 percent) or calculates 6 months of interest on the amount prepaid above 20 percent of the original principal.
- Is the penalty hard (applies to both sale and refinance) or soft (waived on third-party sale)? Never assume a penalty is waived when you sell the building unless the Prepayment Rider explicitly states so.
- How much extra principal can I pay down each year without triggering the penalty? Ask whether the Note Addendum permits a 20 percent annual principal curtailment penalty-free or whether any curtailment above scheduled monthly principal triggers a partial fee.
- How does the property state affect the available prepayment options? If your rental is in a state with statutory prepayment limits (such as Ohio, Minnesota, Pennsylvania, Alaska, Illinois, Maryland, or Iowa), verify which rider the wholesale lender’s compliance desk will actually issue at closing.
- What happens if I want to shorten the prepayment window by one or two years before closing? Have your broker show you the side-by-side comparison between a 5-year, 3-year, 2-year, 1-year, and 0-year option across wholesale lenders so you can make an informed dollar decision.
- If I am refinancing an existing DSCR loan, what is the exact anniversary date on my current Note? Check the date of the first payment and the execution date on your existing Promissory Note—waiting a few weeks to cross an anniversary date can drop your payoff fee by 1 percent of the loan balance (or eliminate it entirely).
Have a DSCR loan or refinance with a prepayment penalty you want modeled?
Direct answer: Share your property state, loan purpose, and scenario details below to have a licensed mortgage broker at Loan Daddy LLC review your current note’s prepayment window or compare 0-year, 1-year, 3-year, and 5-year wholesale DSCR refinance options side by side—with no obligation.
What are the most common questions about DSCR loan prepayment penalties?
Direct answer: Below are concise answers to the eight most common questions real estate investors ask when auditing an existing Prepayment Note Addendum, calculating payoff fees on a sale or cash-out refinance, or choosing between step-down, 6-months-interest, and no-penalty riders on a new business-purpose DSCR refinance.
Why can DSCR loans have prepayment penalties when most consumer home loans cannot?
Federal Ability-to-Repay rules (12 CFR 1026.43(g)) restrict prepayment penalties on most consumer-purpose closed-end mortgages. Loans made primarily for business purposes, such as DSCR loans on non-owner-occupied rentals, are generally outside Regulation Z (12 CFR 1026.3(a)), so the lender may offer a prepayment penalty.
Can I get a DSCR loan with no prepayment penalty at all?
Yes. Most wholesale DSCR lenders offer a 0-year (no prepayment penalty) option alongside 1-year, 2-year, 3-year, and 5-year structures. Choosing a no-penalty rider gives you complete freedom to sell or refinance at any time, though it alters the wholesale pricing grid and may slightly increase the monthly payment used to calculate your DSCR.
What is the difference between a 3-2-1 step-down and a 3-3-3 fixed prepayment penalty?
On a 3-2-1 step-down penalty, the payoff fee drops each anniversary: 3 percent of the unpaid balance in Year 1, 2 percent in Year 2, 1 percent in Year 3, and 0 percent starting in Year 4. On a 3-3-3 fixed (level) penalty, the fee remains a flat 3 percent of the balance throughout all 36 months—meaning a refinance in month 34 costs three times as much on a 3-3-3 rider as on a 3-2-1 rider.
Does making extra monthly principal payments trigger a DSCR prepayment penalty?
That depends on the exact wording of the Prepayment Note Addendum. Many wholesale DSCR riders—especially 6-months-interest structures—allow the borrower to prepay up to 20 percent of the original principal balance in any 12-month period without penalty, triggering the fee only when cumulative curtailments exceed 20 percent or the loan is paid off in full. Other hard percentage step-down riders assess the percentage on any principal curtailment above scheduled amortization.
Can I roll my existing DSCR prepayment penalty into the new loan when I refinance?
Yes, provided the new DSCR loan has sufficient loan-to-value (LTV) and debt service coverage head-room. On a rate-and-term or cash-out DSCR refinance, the existing lender includes the prepayment penalty on the official payoff demand statement, and proceeds from the new wholesale loan can pay off both the principal balance and the contractual prepayment fee at closing.
If I sell the rental property to an unrelated third-party buyer, do I still owe the prepayment penalty?
If your loan has a "hard" prepayment penalty (the standard on most wholesale DSCR loans), yes—the penalty is owed whether you pay off the loan by refinancing or by selling the property. If you specifically negotiated a "soft" prepayment penalty rider at origination, the penalty applies to a refinance during the penalty window but is waived on an arm’s-length sale to an unrelated third party.
Does closing in an LLC change which state prepayment rules apply?
Not necessarily. Several state exemptions for corporations, entities or business-purpose borrowers apply only to interest-rate (usury) caps, not to prepayment rules, and state prepayment limits often turn on owner-occupancy, unit count, loan amount, loan purpose and lender type. Whether a particular state rule reaches an LLC borrower is a question for a licensed attorney in that state; ask the lender for the exact prepayment terms in writing.
Where in my closing documents is the prepayment penalty legally defined?
Because business-purpose DSCR loans do not always use consumer TRID Closing Disclosures, the binding prepayment terms live in the Promissory Note and the attached Prepayment Note Addendum (or Prepayment Rider). Always review the exact Rider text before signing closing documents.
Reviewed by Loan Daddy LLC editorial team · Updated October 21, 2026. Loan Daddy LLC is a mortgage broker, not a lender (NMLS #2827624 · Equal Housing Opportunity). Business-purpose loans for non-owner-occupied investment property only; not for personal, family or household use. Not a commitment to lend. All loans subject to underwriting and lender/investor approval; terms subject to change.