Dscr Loans And Prepayment Penalty

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Dscr Loans And Prepayment Penalty

Megha MathurPro Member
New to Real Estate · MA · Member since 2023 · 5 posts · 8 votes

Hello all, 

We are looking to use the DSCR loans for buying our investment property. We were told about the prepayment penalty...now I do have a general understanding of what the prepayment penalty is...are there any lenders that offer these types of loans without the penalty? What kind of terms would I be looking at, let's say for a $350K property? We are looking in Texas.

Would appreciate any and all help in helping me get a clearer picture on this...thank you! 

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Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
2y

It's common to see pre-payment penalties in this loan product and now lenders are less inclined to negotiate these pre-payment penalties down knowing rates are expected to continue to decrease which incentivizes the borrower to refinance. At this time, you might come out ahead using a hard money lender who does not charge a pre-payment penalty. When looking at the whole picture, you may pay higher finance charges for the next year or two but could theoretically still come out ahead if there's no pre-payment penalty. Also, some lenders I work with do not charge the pre-payment penalty if you refinance with them, or it is reduced significantly. That is something to ask your lender.

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    2y

    @Megha Mathur

    I don't think there are ones w/o prepayment penalty.  However, I do know that it varies from lender to lender.  Remember, its not a conforming loan so its basically unregulated.  It may fit a general set of criteria so it can have a product name, but lenders can choose what they want to offer. Of course, that will change the price/cost.

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  • Stuart UdisPro Member
    Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
    2y

    It's common to see pre-payment penalties in this loan product and now lenders are less inclined to negotiate these pre-payment penalties down knowing rates are expected to continue to decrease which incentivizes the borrower to refinance. At this time, you might come out ahead using a hard money lender who does not charge a pre-payment penalty. When looking at the whole picture, you may pay higher finance charges for the next year or two but could theoretically still come out ahead if there's no pre-payment penalty. Also, some lenders I work with do not charge the pre-payment penalty if you refinance with them, or it is reduced significantly. That is something to ask your lender.

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    1Reply
  • Brandon BeardtPro Member
    Lender · La Crescenta, CA · Member since 2021 · 261 posts · 157 votes
    2y
    Quote from @Megha Mathur:

    Hello all, 

    We are looking to use the DSCR loans for buying our investment property. We were told about the prepayment penalty...now I do have a general understanding of what the prepayment penalty is...are there any lenders that offer these types of loans without the penalty? What kind of terms would I be looking at, let's say for a $350K property? We are looking in Texas.

    Would appreciate any and all help in helping me get a clearer picture on this...thank you! 


     Hi Megha,

    The short answer to your question - yes, there are DSCR loan programs that offer no prepayment penalty. The Rate/Terms are going to be worse considering it's not in the best interest to the lender to do a DSCR loan without a prepayment penalty, but some lenders do offer it. These lenders have to package these loans together and sell them on the secondary market to recoup their capital, and I would say that there's much more of an appetite with secondary market investors for loans with prepay penalties than without. Regardless of the lender, expect a higher rate and cost associated with a DSCR loan with no prepayment penalty compared to a DSCR loan with a prepayment penalty. Don't forget to take into account additional closing costs for the next transaction as well, as I'm assuming the purpose of the no prepayment penalty is to refinance if rates improve.

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  • Derek BrickleyBusiness Member
    Lender · Ann Arbor, MI · Member since 2021 · 672 posts · 228 votes
    2y

    Hey Megha!  As others have mentioned it is a trade off.  In the current market we are doing majority with no prepayment penalties since there may be an opportunity to refinance if/when rates comes down.  But also weigh the alternative of how costly the prepayment penalty is.  We are handling one now where the prepayment penalty will be $750, and it was a nobrainer since he is getting better terms.  

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  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
    2y
    Quote from @Megha Mathur:

    Hello all, 

    We are looking to use the DSCR loans for buying our investment property. We were told about the prepayment penalty...now I do have a general understanding of what the prepayment penalty is...are there any lenders that offer these types of loans without the penalty? What kind of terms would I be looking at, let's say for a $350K property? We are looking in Texas.

    Would appreciate any and all help in helping me get a clearer picture on this...thank you! 

    Hi Megha,

    In general every DSCR loan will most likely come with some sort of default PPP. Depending on the investor and lender you are speaking with, there are typically several options and choices. Standard PPP structure could be 5-4-3-2-1 stepdown. Let's say in a 5-4-3-2-1 the rate is 8.000% if you choose to buy out 24 months of PPP to a 3-2-1 PPP the rate could go up lets say to 8.500% Now, these are of course not real numbers or quoted rates, Im just using it as an arbitrary example. Lenders will always find a way to make up what you choose to buy out or down. Some may just eliminate the entire PPP for additional points at closing. All depends who you use.

    Now, the other thing to watch out for is the structure of the PPP. Heres some common structures:
    5-4-3-2-1 - Stepdown (5%,4%,3%,2%,1%)
    Flat PPP - 5 year PPP and there is a 5% hit in fees at any point in time within the 60months
    Abbreviated PPP - 6 months of interest payments on 80% of the balance at closing.

    It's all different... just shop it out and choose a dscr broker who has the knowledge to help you make an educated decision. Good luck!

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  • Dallas Sauer
    Lender · Phoenix Arizona · Member since 2018 · 89 posts · 51 votes
    2y
    Quote from @Megha Mathur:

    Hello all, 

    We are looking to use the DSCR loans for buying our investment property. We were told about the prepayment penalty...now I do have a general understanding of what the prepayment penalty is...are there any lenders that offer these types of loans without the penalty? What kind of terms would I be looking at, let's say for a $350K property? We are looking in Texas.

    Would appreciate any and all help in helping me get a clearer picture on this...thank you! 


     It really depends on your overall needs. Our best rates will be with a 5-4-3-2-1 prepay. That being said, we have a prepay of 1% in year 1 and nothing after that. The rate is higher than with the standard prepay but if you are still looking to be at rental rates but have the option to sell within a year or so it is a great option.

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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    2y

    @Megha Mathur

    You can find DSCR without a prepayment penalty but you would pay a higher origination fee and rate. Your best bet is to take a 12-36 month STEPDOWN prepayment penalty.

    With a 24 month stepdown, if you refinanced one year later you would only incur a 1% charge on the total outstanding loan amount. Most of our borrowers take a 3,2,1 stepdown. This typically gives the best pricing and flexibility. 

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  • Austin ClarenceBusiness Member
    Lender · Phoenix, AZ · Member since 2023 · 136 posts · 32 votes
    2y

    Hi Megha, yes there are definitely many DSCR options without prepayment penalties. I closed a few of them last year. This is when using a broker is key because you can look at all DSCR options out there. I can message you some more info if you would like.

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  • AJ ExnerPro Member
    Lender · Springfield, MO · Member since 2023 · 656 posts · 318 votes
    2y
    Quote from @Megha Mathur:

    Hello all, 

    We are looking to use the DSCR loans for buying our investment property. We were told about the prepayment penalty...now I do have a general understanding of what the prepayment penalty is...are there any lenders that offer these types of loans without the penalty? What kind of terms would I be looking at, let's say for a $350K property? We are looking in Texas.

    Would appreciate any and all help in helping me get a clearer picture on this...thank you! 


    Hey Megha, 

    There are some good options out there, but there is usually a decent little rate bump or point you would pay on the front end to remove the PPP. Are you looking for a complete removal of it or would a reduced PPP (3 year @ 3/2/1) be sufficient? 

    My only concern would be the DSCR in Texas on a purchase of that size and the rate increase with a PPP removal like that. You could run into a cash flow issue at that point.

    Have you considered a stabilized bridge? Just doing a 12-24 month, interest-only payment that would actually encourage you to refinance or sell within that time period?

    [email protected]417-427-2612
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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y
    Quote from @Megha Mathur:

    Hello all, 

    We are looking to use the DSCR loans for buying our investment property. We were told about the prepayment penalty...now I do have a general understanding of what the prepayment penalty is...are there any lenders that offer these types of loans without the penalty? What kind of terms would I be looking at, let's say for a $350K property? We are looking in Texas.

    Would appreciate any and all help in helping me get a clearer picture on this...thank you! 


     Hey Megha, 

    You can price a DSCR loan without a Prepayment Penalty. If you would like to keep the same rate it would be a 1.5% cost. Or you can increase the rate without the cost.

    kindly, 

    [email protected]818-269-7983
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  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    2y
    Quote from @Megha Mathur:

    Hello all, 

    We are looking to use the DSCR loans for buying our investment property. We were told about the prepayment penalty...now I do have a general understanding of what the prepayment penalty is...are there any lenders that offer these types of loans without the penalty? What kind of terms would I be looking at, let's say for a $350K property? We are looking in Texas.

    Would appreciate any and all help in helping me get a clearer picture on this...thank you! 


    Yes, most of our DSCR products do NOT have pre-payment penalties (as long as you are not refinancing AND had the house on the market in the last 6 months) and with 20% down would be the in mid's 7's assuming good credit/DSCR over 1.00 etc.

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  • Carrie Matuga
    Lender · Riverside, CA · Member since 2017 · 248 posts · 98 votes
    2y

    @Megha Mathur You can find DSCR loans without a prepayment penalty, but there is an "interest rate penalty" for choosing that option. I've been advising my investors to look at options that do still have a pre-payment penalty, but that the window is shorter and it is a step-down. In your case this could mean with a 350K purchase price and a 75% LTV loan of 262,500 your prepayment penalty on a 3 year step-down option would look like this 3,2,1, meaning that in 1st year it is 3% of 262,500, 2% in year 2 and 1% in year 1. I would also look at the year option to see how that varies. With the points and closing costs you pay when refinancing, you might look at what your payment would look like if rates dropped 0.50%, 1% and 2% to decide WHEN it would make the most sense. Using your own judgement about where you think interest rates will go, and the cost difference between 1, 3, and 5 year PPP will likely land you in a good spot. I'm both an investor as well and as an investor, i'm exclusively looking at 1 year and 3 year options for PPP.

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  • Stephen Johnson
    Member since 2024 · 1 post · 0 votes
    2y
    Quote from @Derek Brickley:

    Hey Megha!  As others have mentioned it is a trade off.  In the current market we are doing majority with no prepayment penalties since there may be an opportunity to refinance if/when rates comes down.  But also weigh the alternative of how costly the prepayment penalty is.  We are handling one now where the prepayment penalty will be $750, and it was a nobrainer since he is getting better terms.  

    Does the prepayment have to be determined before the lender locks in a rate, or is this something that can be negotiated afterwards. Thank you, Stephen 
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  • Dallas Sauer
    Lender · Phoenix Arizona · Member since 2018 · 89 posts · 51 votes
    2y
    Quote from @Stephen Johnson:
    Quote from @Derek Brickley:

    Hey Megha!  As others have mentioned it is a trade off.  In the current market we are doing majority with no prepayment penalties since there may be an opportunity to refinance if/when rates comes down.  But also weigh the alternative of how costly the prepayment penalty is.  We are handling one now where the prepayment penalty will be $750, and it was a nobrainer since he is getting better terms.  

    Does the prepayment have to be determined before the lender locks in a rate, or is this something that can be negotiated afterwards. Thank you, Stephen 

     Typically you will lock that in with your lender while confirming terms. They should be able to show you multiple options with the different prepayment penalties. 

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  • Derek BrickleyBusiness Member
    Lender · Ann Arbor, MI · Member since 2021 · 672 posts · 228 votes
    2y

    Yes you should have that information prior to locking your rate. Each lender will be different, but when using DSCR your terms impact your debt-service ratio so it will be important to get that taken care of earlier rather than later.

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  • Rakumarudu Nijam
    Member since 2023 · 35 posts · 7 votes
    2y
    Quote from @Derek Brickley:

    Hey Megha!  As others have mentioned it is a trade off.  In the current market we are doing majority with no prepayment penalties since there may be an opportunity to refinance if/when rates comes down.  But also weigh the alternative of how costly the prepayment penalty is.  We are handling one now where the prepayment penalty will be $750, and it was a nobrainer since he is getting better terms.  

    Can you please how the prepayment is calculated? $750 seems reasonable
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  • Derek BrickleyBusiness Member
    Lender · Ann Arbor, MI · Member since 2021 · 672 posts · 228 votes
    2y

    Every lender and option will be different!  No cut and dry calculation for it.  Some might be 1% of the loan amount, some might be as high as 5%.  That's why understanding the terms will be important.

    [email protected]734-645-7722
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