- 5-4-3-2-1 is the default. 3-2-1, 2-1, flat 5% and no-penalty options exist, and a shorter or smaller penalty costs more in rate or points.
- Selling in year two with $300,000 owed costs $12,000 under 5-4-3-2-1, $6,000 under 3-2-1 and $15,000 under a flat 5%.
- On one wholesale rate sheet dated October 19, 2026, dropping a 5-year penalty cost 2.625 points; moving to a 3-year cost 0.625.
- Penalties are a business-purpose feature. Fannie Mae won't buy loans that carry them, and federal consumer-mortgage limits don't apply to business-purpose credit.
- Several states are off-limits for penalties at some lenders, and the lists differ. Ask the lender before you lock.
A penalty is a fee for leaving early, and it buys you rate
A DSCR loan prepayment penalty is a fee you owe if you pay off the loan, by selling or refinancing, during a set period after closing. It's usually a percentage of the amount you pay off, and it typically steps down each year until it disappears. Lenders like it because it lowers the risk of an early payoff, and they price for that: as LendingOne puts it, agreeing to a penalty can qualify you for a lower rate.
Penalties are a feature of business-purpose lending. Fannie Mae won't buy a loan with a prepayment penalty (Selling Guide A3-2-02). For consumer mortgages, Regulation Z allows penalties only on certain fixed-rate qualified mortgages, caps them at 2% in the first two years and 1% in the third, and bans them after three years. But Regulation Z exempts credit extended primarily for a business purpose and credit extended to an LLC or other non-natural person. DSCR loans are business-purpose loans for investment property you won't live in, so lenders can write longer, larger penalties, within state law.
Two things follow for you. A DSCR quote usually includes a penalty unless you ask for one without it. And the structure is yours to choose: the lender prices whichever option you pick, so the decision is a trade between rate and flexibility, not a take-it-or-leave-it term.
Five common structures, from cheapest pricing to most flexible
| Structure | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 | Rate effect |
|---|---|---|---|---|---|---|
| 5-4-3-2-1 | 5% | 4% | 3% | 2% | 1% | Low rate; the default most advertised rates assume |
| Flat 5% for 5 years | 5% | 5% | 5% | 5% | 5% | Longer and higher, so priced at or below 5-4-3-2-1; confirm |
| 3-2-1 | 3% | 2% | 1% | 0 | 0 | Higher than a 5-year |
| 2-1 | 2% | 1% | 0 | 0 | 0 | Higher again |
| None | 0 | 0 | 0 | 0 | 0 | Highest rate or most points |
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The direction is consistent across lenders. Easy Street says the higher and longer the penalty, the lower the rate. Griffin Funding says a longer penalty means a lower rate and buying it out means a higher one. Advertised rates usually assume the long version: Defy builds the 5-4-3-2-1 into its published DSCR rates, and Total Quality Lending's October 26, 2026 rate quote assumes a 5-year penalty. Some programs cap the term instead; Kiavi's DSCR page says there's no penalty after year three.
Variations exist. Arch Mortgage Funding's June 2026 DSCR bulletin lists fixed 5%, 4% or 3% penalties for one to five years, declining 5/4/3, 5/4 and 4/3 schedules, and a six-months'-interest option. eLEND's matrix uses a flat 3% of the original balance for at least three years. Read three things in the note: the schedule, what the percentage applies to, and what triggers it.
What the percentage applies to
Most penalties apply to the amount prepaid. Some exempt part of it: Arch's structures charge only on prepayments above 20% of the original principal, and its six-month option charges six months of interest on that same excess. Partial paydowns can count too. Arch's penalty applies to curtailments above 20% of the original balance in any 12 months, and eLEND's flat penalty applies to curtailments or the full balance during the penalty period.
What triggers it
Sale and refinance both trigger the penalty at the lenders above. That matters because a penalty can cost you on a profitable exit, not just on a rate-driven refinance. If you might sell to another investor in year two, the penalty is part of your sale math.
What a shorter penalty costs: numbers from one rate sheet
Few lenders publish the price of each option. Spring EQ's wholesale DSCR rate sheet dated October 19, 2026 does, as price adjustments in points of the loan amount, the same at every LTV tier:
| Penalty option | Price adjustment | Cost vs. 5-year on $300,000 |
|---|---|---|
| 5-year (5/4/3/2/1) | +0.250 | — |
| 3-year (3/2/1) | −0.375 | 0.625 points = $1,875 |
| 1-year (3%) | −1.000 | 1.250 points = $3,750 |
| None | −2.375 | 2.625 points = $7,875 |
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You can usually take that cost as a higher rate instead of points. Reading across the same sheet's rate grid for a 760-score purchase at 75% LTV, the 3-year option lands about a quarter point higher in rate than the 5-year, and no penalty roughly a full point higher. Other lenders price these options differently, so get quotes for each structure on the same day.
When you shop, ask each lender to price the same loan three ways, with a 5-year penalty, a 3-year penalty and none, on the same day and with the same lock period. Compare the rate and points together. A lender that quotes only the 5-year option is showing you its cheapest-looking rate, not necessarily your lowest total cost.
Worked example: selling in year two with $300,000 owed
You sell during the second year after closing and pay off a $300,000 balance. The penalty applies to the full amount prepaid. The last column shows the same payoff in year four for comparison.
| Structure | Year-2 percentage | Penalty owed in year 2 | Penalty if you sell in year 4 |
|---|---|---|---|
| 5-4-3-2-1 | 4% | $12,000 | 2% = $6,000 |
| 3-2-1 | 2% | $6,000 | $0 |
| Flat 5% | 5% | $15,000 | 5% = $15,000 |
| 2-1 | 1% | $3,000 | $0 |
| None | 0% | $0 | $0 |
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Now add the upfront cost from the rate sheet. For a year-two exit, the 5-year option costs $12,000 in penalty. The 3-year costs $1,875 in extra price plus a $6,000 penalty, or $7,875. No penalty costs $7,875 in price and nothing at exit. On that sheet, the 3-year and no-penalty options tie for a year-two exit, and both beat the 5-year by $4,125.
Hold past year five and the math flips: the 5-year penalty has expired, and you've saved the $1,875 or $7,875 the shorter options would have cost. If your note exempts 20% of the original principal, recalculate on the excess. On a loan that started at $300,000, a 4% penalty would apply to $240,000, for $9,600 instead of $12,000.
Weigh the penalty by the odds you'll pay it
A penalty is a cost you pay only if you leave early. Extra points or rate you pay for certain. That makes the choice a bet on your own exit, so put rough odds on it. If you think there's a 50% chance you'll sell or refinance in year two, the 5-year option's expected penalty is $6,000, half of $12,000. The 3-year option costs $1,875 for certain plus half of $6,000, or $4,875, so it wins. Drop the odds to 25% and the 5-year's expected cost falls to $3,000 against the 3-year's $3,375: the 5-year wins, narrowly.
No penalty, at $7,875 for certain, wins outright only when an early exit is close to a sure thing and comes in year one. Then the 5-year penalty is $15,000 and the 3-year's is $9,000 plus its $1,875 in price.
A higher rate also lowers your DSCR
The no-penalty option doesn't just cost money; it can change whether the loan qualifies. Take a $300,000 loan, $2,700 of monthly rent and $450 a month in taxes and insurance. At an illustrative 7.00% with a 5-year penalty, P&I is $1,996, PITIA $2,446 and the DSCR 1.10. Take no penalty at roughly a point higher, 8.00%, and P&I rises to $2,201, PITIA to $2,651 and the DSCR falls to 1.02. That still clears a 1.00 minimum, barely. Pricing grids also reward higher ratios: the same Spring EQ sheet adds 0.250 to 0.375 points of price at a DSCR of 1.25 or more and charges 0.375 to 1.000 points below 1.00.
Choose by hold period, not by headline rate
| Expected exit | Structure to price first | Why |
|---|---|---|
| Within 12 months | None, or a bridge loan instead | Any penalty is at its peak; Lima One and Kiavi publish no prepayment penalty on bridge loans |
| Years 2–3 | 3-2-1 or 2-1 | The penalty is 1–2% or gone by the time you exit |
| Years 4–5 | 3-2-1 vs. 5-4-3-2-1; run both | The 5-year still costs 1–2% at exit; weigh it against the 3-year's extra price |
| 5+ years | 5-4-3-2-1 or flat 5% | The penalty expires before you leave; take the lower rate |
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Be honest about refinance risk. A rental you plan to hold for a decade may still be refinanced in year two if rates fall, or if you want cash out for the next purchase. If either is realistic, price a 3-year option against the 5-year and treat the difference as insurance. The same goes for a value-add rental you might sell to another landlord once it's stabilized: keep the penalty short. If the DSCR loan is the refinance at the end of a BRRRR, you'll usually hold it for years, which favors the 5-year, unless you expect to pull cash out again to fund the next purchase.
Questions to ask before you lock
- What's the schedule, and does each year's percentage apply to the amount prepaid, the original balance or the full outstanding balance?
- Is any prepayment free, such as 20% of the original principal each year?
- Do partial paydowns trigger the penalty?
- What does each alternative structure cost, in rate and in points, on today's pricing?
- Can the lender charge a penalty in my property's state, and does closing in an LLC change that?
State limits: where lenders won't charge a penalty
Some states limit prepayment penalties on residential loans, and lenders apply those limits to DSCR loans differently: some by state, some by whether the borrower is an individual or an entity. We couldn't find a single authoritative list. Here's what three lenders published in 2026:
| State | Arch Mortgage Funding (June 2026) | eLEND (September 2026) | Total Quality Lending (October 2026) |
|---|---|---|---|
| Alaska, Michigan, Minnesota, New Mexico, Rhode Island | Not allowed | Not allowed | Not allowed |
| Maryland, Mississippi, Ohio | Not allowed | Not allowed | Not listed |
| Kansas | Not listed | Not allowed | Not allowed |
| Illinois, New Jersey | Not allowed on loans to individuals; allowed on loans to corporations | Not allowed | Not listed |
| Arkansas, North Dakota, Pennsylvania, West Virginia, Wisconsin | Not listed | Not allowed | Not listed |
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Read the table as a starting point, not a rulebook. Each list reflects that lender's reading of state law and its own risk appetite. Where a penalty isn't allowed, the loan usually costs more: Arch applies its no-penalty price adjustment in those states. If your property is in one of them, or you're deciding between closing in your own name or an LLC, ask the lender for its current state matrix and have an attorney review the note. Nothing here is legal advice.