Prepayment Penalty Rules for DSCR Loans in New Jersey

Prepayment Penalties are Fully Allowed if the Borrower is a C-Corporation Entity only (i.e. title is vested in a C Corporation only) for DSCR Loans in New Jersey. Under N.J. Rev. Stat§ 46:10B-2, mortgage loans made to natural persons may not include prepayment penalties. However, this restriction does not apply to business-purpose loans like DSCR Loans when originated to entities such as LLCs or corporations. New Jersey defines a “home loan” as “debt primarily for personal, family, or household purposes,” so DSCR Loans, which are strictly for investment purposes, fall outside this scope.

In (2014), a borrower challenged the legality of a prepayment penalty on a commercial rental property loan. The court upheld the penalty, noting that the loan was business-purpose and emphasizing that “mortgagor” in the relevant statute referred to individuals, not corporations. This ruling has shaped common industry practice. Consequently, DSCR Lenders can typically offer all standard prepayment penalty options such as Descending Prepay Penalties (i.e. “4/3/2/1”), Flat Prepay (i.e. 5/5/5/5/5) or other tailored structures in the Garden State.

Note: the borrower on a DSCR Loan is different than a guarantor, the borrower refers to the official borrower title is vested in and that appears on the note, while the guarantors are individuals who sign recourse guarantees. New Jersey DSCR Loans with borrowers that are entities and have prepayment penalty provisions still will be required to have individuals sign recourse guarantees and this does not affect prepayment penalty provision eligibilities.

Update: 5-26-2026: Recent developments in legal interpretations have changed my lender guidance with many DSCR Lenders now citing New Jersey Department of Banking and Insurance Opinion (DOBI) opinion (No. 0081), which suggests that LLCs categorized as corporations under the statute causing most DSCR Lenders for 2026 to now require title not only to be vested in an entity, but specifically a C-Corporation, in order to offer any prepayment penalty options on DSCR Loans in New Jersey. DSCR Lenders will now typically not allow prepayment penalty provisions not only DSCR Loans given to individuals as borrowers but also LLCs, partnerships and trusts as well.

FULL Complete 2026 Guide To DSCR Loan Prepayment Penalties

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