Are Prepayment Penalties Allowed on DSCR Loans in Illinois?

[Robin Simon]

🤔🤔🤔 Are Prepayment Penalties Allowed on DSCR Loans in Illinois?

➡️➡️ ➡️ Prepayment Penalties are Fully Allowed if the Borrower is an Entity (i.e. title is vested in an LLC or similar structure, not an individual or individuals) for DSCR Loans in Illinois. For DSCR Loans in which the borrower is an individual or individuals (i.e. not an entity), 205 ILCS 635(v) states that prepayment penalty provisions are only allowed if the interest rate is below 8%, the duration of the penalty period is a maximum of three years and the fee does not exceed 3% in year one, 2% in year two, and 1% in year three, with no penalty thereafter and the lender presents a written disclosure offering the borrower a choice between a loan with no prepayment penalty and one with a prepay provision, along with the full terms of both options. This is in contrast to regulations found in Illinois Statutes Ch. 815 § 205/4, which allow DSCR Lenders to utilize prepayment penalty provisions without restriction to entity borrowers.

In practice, because most DSCR Loans are to entity borrowers instead of individuals, and vesting in an LLC is typically now low in cost, quick to set up and easily accessible, DSCR Lenders usually offer all standard prepayment penalty options in Illinois and require borrowers to be entities rather than individuals while also offering DSCR Loans with no prepayment penalties (and higher pricing) to individuals in the Land of Lincoln.

Note: The borrower on a DSCR loan refers to the party listed on title and the promissory note — typically an LLC or corporation in DSCR structures. Guarantors (who sign recourse guarantees) are usually individuals and are not relevant to prepayment eligibility restrictions. Illinois DSCR loans with entity borrowers remain eligible for prepayment structures regardless of guarantor identity.

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