Prepayment penalties on DSCR loans for paying extra?

Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 28 votes

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?

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John W.

Dallas, TX · Member since 2023 · 15 posts · 26 votes

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.

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John W.
Dallas, TX · Member since 2023 · 15 posts · 26 votes
2y
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.
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Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
2y
@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.
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Joseph Agins
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Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 28 votes
2y
Quote from @John W.:

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.

Thanks John! I'll see what the lender says tomorrow but I have to assume it's something like 20% as you mention. I'm going to proceed regardless as not planning on paying off that early nor paying down that substantially in the 1st 5 years. However, the language regarding "any partial reduction payments" did surprise me and pique my interest. Thanks again!
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Joseph Agins
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Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 28 votes
2y
Quote from @Stuart Udis:

@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.

Thank you and great info Stuart! I was totally guessing/assuming on the 10-20% but will confirm with the lender tomorrow.
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John W.
Dallas, TX · Member since 2023 · 15 posts · 26 votes
2y
Absolutely, good luck!
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Devin PetersonBusiness Member
Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 670 votes
2y
Quote from @Joseph Agins:

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?

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!
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Account Closed
Rental Property Investor · New Braunfels, TX · Member since 2022 · 409 posts · 408 votes
2y
Quote from @Joseph Agins:

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?
Joseph, I have a DSCR loan with a 5 year pre-payment penalty. I'm paying $85 a month extra on the loan and it knocks 5% off the first year so I'm only paying $80.75 extra on principal each month with $4.25 "penalty" fee. The second year will be 4%, third year 3% etc.... My renter is paying for it anyways so I don't mind the penalty.
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Joseph Agins
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Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 28 votes
2y
Quote from @Account Closed:

Quote from @Joseph Agins:

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?
Joseph, I have a DSCR loan with a 5 year pre-payment penalty. I'm paying $85 a month extra on the loan and it knocks 5% off the first year so I'm only paying $80.75 extra on principal each month with $4.25 "penalty" fee. The second year will be 4%, third year 3% etc.... My renter is paying for it anyways so I don't mind the penalty.
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?
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Jacob Sherman
12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
2y
every lenders prepayment penalty works a little differently
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Account Closed
Rental Property Investor · New Braunfels, TX · Member since 2022 · 409 posts · 408 votes
2y
Quote from @Joseph Agins:

Quote from @Account Closed:

Quote from @Joseph Agins:

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?
Joseph, I have a DSCR loan with a 5 year pre-payment penalty. I'm paying $85 a month extra on the loan and it knocks 5% off the first year so I'm only paying $80.75 extra on principal each month with $4.25 "penalty" fee. The second year will be 4%, third year 3% etc.... My renter is paying for it anyways so I don't mind the penalty.
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?
This one was done in late 2022.
1 Reply
Ron S.
Paradise, CA · Member since 2015 · 1k+ posts · 871 votes
2y
Quote from @Joseph Agins:

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?

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.
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Joseph Agins
OP
Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 28 votes
2y
Quote from @Ron S.:

Quote from @Joseph Agins:

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?

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.

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.
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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
1w
Hey Joseph,
This rule varies from lender to lender. Some will allow you to pay up to 50% of the principal balance before it triggers, others 20%, and some will not allow you to make extra principal payments at all.
I would check with the lender and servicer to make sure you are not penalized.
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