Guides
DSCR Loan Closing Costs and Prepayment Penalties
DSCR closing costs run 2–5% of the loan. See the line items, the four prepayment penalty structures, and when buying the penalty out actually pays.
Closing costs on a DSCR mortgage are generally 2% to 5% of the amount borrowed.
You can estimate most DSCR closing costs before the loan closes, but the prepayment penalty may not become relevant until you decide to sell or refinance. It is also the feature first-time DSCR borrowers most regret when they need to exit the loan sooner than expected. Review both the upfront costs and early-payoff terms before accepting a term sheet.
What DSCR closing costs run
For DSCR loans, budget 2% to 5% of the loan amount, compared with approximately 1% to 3% for conventional financing. On a $300,000 DSCR mortgage, that translates to about $6,000 to $15,000 before your down payment and before reserves. See your DSCR loan down payment to estimate the additional cash you will need.
| Line item | Publicly observed amounts | Note |
|---|---|---|
| Origination / points | 1%–3% of the loan | Usually the largest charge. Conventional investment-property origination commonly runs about 0.5%–1%. |
| Appraisal | Practitioner reports suggest $750–$1,000; not verified from published lender schedules | A DSCR appraisal can cost more because rental support is ordered with the valuation. |
| Form 1007 rent schedule | Often included with the appraisal; no independently verified range | The Form 1007 rent schedule supports market rent for a one-unit property. Fannie Mae Form 1007 is the official form; Form 1025 applies to properties with two to four units. |
| Underwriting / processing | Practitioner reports suggest $1,500–$2,500; not verified from published lender schedules | Charges vary considerably, so obtain the actual amount in writing. |
| Credit report | Practitioner reports suggest $50–$200; not verified from published lender schedules | A tri-merge report is generally ordered for each guarantor. |
| Title search, title insurance, and settlement | Depends on the state and transaction | The lender's title policy is required. An owner's policy is optional but customary. |
| Recording and transfer taxes | Depends on the state and county | The amount can be material and may also arise when deeding a property into an LLC. |
| Escrow deposits and prepaid taxes and insurance | Approximately $3,500 in this site's example | These are expenses paid earlier than usual, not added lender fees. |
| Entity review / legal | No verified published range | Some programs charge separately to review LLC documents. |
Lenders generally estimate total DSCR closing costs at 2% to 5% of the loan amount, but they rarely publish the cost of each individual fee. The appraisal, processing, credit report, and LLC review estimates above come from mortgage professionals, not official lender fee schedules. Use them only for early planning and confirm the actual costs on lender fee worksheets or settlement statements.
How prepayment penalties work
A prepayment penalty is a fee for paying the loan off early. On a DSCR loan, the charge may be triggered by a sale, refinance, or principal reduction above the note's permitted threshold. Lenders use these provisions because DSCR mortgages are securitized and sold, and investors value a predictable period of interest payments.
The four structures:
- Step-down: This is the most common form. Under a 5-4-3-2-1 schedule, the charge equals 5% in year one, 4% in year two, 3% in year three, 2% in year four, and 1% in year five. Shorter alternatives include a three-year 3-2-1 schedule and a one-year penalty of approximately 2% to 3%.
- Flat: The same percentage applies throughout a defined period. One example is a 3% charge during each of the first three years, followed by no penalty.
- Hard versus soft: A hard provision applies whenever the debt is paid off. A soft provision excludes a sale and charges only when the borrower refinances. Investors who may sell should request a soft penalty specifically.
- Yield maintenance: The payoff amount compensates the lender for interest it expected to receive. This structure is uncommon on residential DSCR financing and may be costly, so calculate the potential exit expense before signing.
Confirm which balance the penalty uses
Lenders may calculate the prepayment penalty using either the original loan amount or the remaining principal balance. Online sources often use “loan amount,” “loan balance,” and “outstanding balance” as though they mean the same thing, but they can produce different penalties. Include this calculation method in the questions you ask a DSCR lender.
For example, a $300,000 mortgage may have about $285,000 remaining in year four. A 2% penalty would be approximately $5,704 if calculated from the remaining principal, compared with $6,000 if calculated from the original loan amount. The difference grows as you pay down the mortgage. To avoid uncertainty, get the basis confirmed in the note instead of relying only on the term sheet.
Ask whether partial prepayments are allowed
Some DSCR loans let you pay down part of the principal without triggering the prepayment penalty. A common limit is 20% of the original loan balance within a 12-month period. If you plan to make large extra payments, confirm this allowance first so your repayment strategy does not lead to an unexpected fee.
What the penalty actually costs
The following example uses a $300,000, 30-year fixed mortgage at 6.5%. The 5-4-3-2-1 charge is calculated from the remaining principal.
| Exit year | Approximate balance | Penalty rate | Penalty owed |
|---|---|---|---|
| Year 1 | $296,647 | 5% | $14,832 |
| Year 2 | $293,069 | 4% | $11,723 |
| Year 3 | $289,251 | 3% | $8,678 |
| Year 4 | $285,177 | 2% | $5,704 |
| Year 5 | $280,828 | 1% | $2,808 |
| Year 6 or later | — | 0% | $0 |
Should you buy the penalty out?
It may be worth paying for a penalty-free loan if you expect to sell or refinance within the first few years. The table below compares that higher interest cost with the potential prepayment penalty on a $300,000 mortgage, assuming the lender increases the DSCR loan rate by 0.375 percentage point to remove the penalty.
| Exit year | Penalty if retained | Approximate additional interest if removed | Less expensive option |
|---|---|---|---|
| Year 1 | $14,832 | Approximately $1,120 | Remove the penalty |
| Year 2 | $11,723 | Approximately $2,220 | Remove the penalty |
| Year 3 | $8,678 | Approximately $3,315 | Remove the penalty |
| Year 4 | $5,704 | Approximately $4,390 | Remove the penalty, by a narrow margin |
| Year 5 | $2,808 | Approximately $5,450 | Retain the penalty and take the lower rate |
| Year 10 | $0 | Approximately $10,500 | Retain the penalty |
In this example, the break-even point comes in year five. The penalty-free loan costs less if the borrower sells or refinances before then. If the borrower keeps the loan until the penalty period ends, accepting the penalty in exchange for a lower interest rate costs less overall. The result will vary based on the loan amount, interest rate, and cost of removing the penalty, so a calculator provides a more useful estimate than a fixed table.
The additional interest shown here is an estimate based on the average principal balance. The calculator uses a full month-by-month amortization schedule to produce a more precise result.
States where prepayment penalties are limited
Prepayment-penalty rules vary by state and may depend on whether the borrower is an individual or a DSCR loan held in an LLC.
Only one lender reviewed publishes a state-by-state list. Under its guidelines:
- Kansas, Minnesota, and New Mexico prohibit prepayment penalties.
- Many lenders also treat North Dakota as a prohibited state.
- New Jersey allows penalties for LLC borrowers but not individuals.
- Ohio restricts penalties on loans below approximately $110,000.
- Illinois prohibits them for individuals and limits them for entities when the APR falls below certain thresholds.
- Pennsylvania restricts them on some loan amounts secured by one- to four-unit properties.
- Rhode Island sets limits based on the penalty period, loan amount, and percentage charged.
However, these are the lender's published guidelines, so borrowers should confirm the rule that applies to their specific loan and ownership structure. If the potential penalty is significant, ask a qualified attorney to review the loan terms instead of relying only on a general online list.
Frequently Asked Questions
DSCR closing costs typically equal 2% to 5% of the loan amount. For a $300,000 loan, budget about $6,000 to $15,000, separate from the down payment and reserves. The exact amount depends mainly on lender points, origination charges, appraisal costs, and state-specific title and recording fees.
Most DSCR loans do, but the terms vary. A common 5-4-3-2-1 penalty charges 5% for paying off the loan in year one and gradually falls to 1% in year five. Shorter penalty periods and penalty-free options are available, and one bank advertises no prepayment penalty. Choosing a loan without the penalty may raise the interest rate by 0.25 to 0.50 percentage points.
A 5-4-3-2-1 prepayment penalty charges 5% if you pay off the loan in year one, 4% in year two, and so on until the fee falls to 1% in year five. After year five, the penalty ends. On a $300,000 loan, an early payoff in year two could cost approximately $11,700. Confirm whether the lender calculates the penalty using the original loan amount or the remaining balance.
Yes. You may be able to choose a penalty-free loan by accepting an interest rate that is about 0.25 to 0.50 percentage points higher or paying an upfront fee of roughly 1.125%. Other options include selecting a shorter one-year or 3-2-1 penalty period. If you only want to make extra principal payments, some loans let you pay down about 20% of the original balance each year without triggering the penalty.
It can be calculated either way, depending on the loan agreement. For example, if a $300,000 mortgage has about $285,000 remaining in year four, a 2% penalty would be approximately $5,704 based on the remaining principal or $6,000 based on the original loan amount. Confirm the calculation method in the signed note, since the term sheet may not provide the full details.
No. State laws may prohibit or restrict them, and some rules differ for individual and LLC borrowers. One lender lists Kansas, Minnesota, and New Mexico as states where it does not allow prepayment penalties and reports limits in New Jersey, Ohio, Illinois, Pennsylvania, and Rhode Island. Because this reflects one lender's guidelines rather than a full legal review, confirm the current rules with your lender and consult an attorney if the potential penalty is substantial.
DSCRLoans101 is an independent editorial site. We do not originate loans and we are not affiliated with any lender. Every figure on this page comes from published lender materials or primary sources, and we publish the date we verified it.
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