Yeah, those prepay penalties are the classic “gotcha” with DSCR loans. I’ve had clients get excited about the rates, then get blindsided by the fine print. It’s not just the penalty either—sometimes the exit process is a headache, too. I get that lenders want some security, but locking folks in for 3-5 years feels a bit much if your strategy is more nimble. Guess it’s all about reading every line and knowing what you’re signing up for... even if it means a few extra cups of coffee.
Those prepay penalties really are the sneaky part—been there, done that, got the “ouch” on my balance sheet. Here’s how I try to sidestep the worst of it when looking at DSCR loans:
First thing, I always ask the lender for the exact prepay schedule. Not just “three years,” but what are the numbers each year? Some will step down, others are just a flat fee no matter when you exit. Huge difference if you’re thinking you might sell or refi early.
Second, I check if there’s a “soft” prepay option—sometimes you can sell to another investor without penalty, but refi is still penalized. Not every lender offers it, but worth asking.
Last bit, I try to bake a little flexibility into my strategy. If I know there’s a chance I’ll want out early, I’ll factor that penalty into my numbers from day one. It’s not fun, but better than getting blindsided.
Honestly, I get why lenders do it, but man... sometimes it feels like you need a law degree and a gallon of coffee just to get through the term sheet.