How do DSCR loan prepayment penalties work?

Standard structure: 5/4/3/2/1 declining schedule (5% if prepaid year 1, 4% year 2, etc., zero after year 5). Some programs offer 3-year flat or no-prepay options at higher rate.

Prepayment penalties (PPP) are how DSCR lenders amortize their origination cost over a multi-year hold period. Standard structures: (1) 5/4/3/2/1 declining schedule - 5% of paid-off principal in year 1, 4% in year 2, declining to 0 after year 5. Most common structure on standard DSCR. (2) 3-year flat - 3% any time within 3 years, then nothing. Common on shorter-term programs. (3) 5-year hard - 5% any time within 5 years, then nothing. Less common, more punitive than declining. (4) No-prepay - no penalty at any time. Available at rate premium 0.4-0.6% over standard PPP. Match PPP to your hold strategy: BRRRR investors planning to refinance within 12-18 months should use 1-year prepay or no-prepay. Long-term hold investors should use 5/4/3/2/1 (cheapest in rate). Sale or refinance triggers PPP. Some PPPs allow 20% annual partial paydown without triggering the penalty - useful for paying down principal aggressively without exit fee.