Prepayment penalties on DSCR loans for paying extra?

Question

Loan Commitment states:

"There is a prepayment penalty of 1% on the loan for any partial or full principal reduction payments made before the end of the fifth year. After the fifth year the loan can be paid off with no prepayment penalty."

So, would the PPP trigger for simply paying a little extra on monthly payments? I need to confirm with the lender but assume any such "partial" payments would have to be substantial and equal to at least 10-20% or more of the total loan?

John W. · Answer

Hi Joseph, you would have to get the specifics on this particular DSCR pre-payment penalty, but they usually apply after there’s been a greater than 20% principle reduction.

Jacob Sherman · Answer

every lenders prepayment penalty works a little differently

Stuart Udis · Answer

@Joseph Agins you will have to consult with the lender but on its face it does seem like any amount accelerated down would trigger the penalty. Certainly nothing in what you shared would leave me to believe an arbitrary 10%-20% reduction would be needed to trigger the penalty.  However kudos to you for taking the time to read and understand your loan agreement. Most fail to take the important steps you’re taking.  I would recommend requesting an answer in writing from the lender. I’ve had instances where lenders have only charged me a penalty on payoffs but it’s really case by case. If pre-payment penalties are a concern federal credit unions are not allowed to charge pre-payment penalties. State chartered credit unions can on a case by case basis depending on the state so it’s important to understand the distinction when borrowing from one.

Account Closed · Answer

This one was done in late 2022.

Joseph Agins · Answer

Ha! Good stuff Ron and thanks for your sage input! I actually just heard back from the lender and he confirmed, in writing (email), that a PPP would only apply for an early payoff and not for increased and/or extra loan payments.

Devin Peterson · Answer

Generally, the PPP is only triggered if the current note is called "due" through a refinance or sale. Only in the PPP time frame will someone be penalized by the lender in the amount of the % that is concurrent with the PPP structure. Good luck!

John W. · Answer

Absolutely, good luck!

Ron S. · Answer

It will state clearly in the note what a partial prepay is that would trigger the fee. Some lenders say anything beyond the billed amount. Some allow 10-20%. Some require a pre approval before any principal curtailment. Its always spelled out in the note. If its not, it would not be enforceable.Don't listen to anyone that says a prepay fee is only triggered when the note is called due through a refinance or sale. They are incorrect and if you follow their advice, be sure to hit them up for the fee when the lender charges you.

Joseph Agins · Answer

Ahhhhh... Thanks Kristi! So, they calculate and charge the penalty at each payment - if you are paying extra. Now I get it and agreed on the renter paying anyway!

On a side note - did you do this particular DSCR recently?

Prepayment penalties on DSCR loans for paying extra?

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