DSCR loan closing costs and prepayment penalties explained

What to budget at closing

Closing costs on a DSCR loan are similar to other investment loans. Typical items include:

• Lender origination fee
• Appraisal and rent schedule
• Title insurance and settlement fees
• Recording fees and, where applicable, transfer taxes
• Insurance premium paid in advance
• Prepaid interest and property tax escrow deposits

Prepayment penalties in plain English

Many DSCR loans include a prepayment penalty. If you pay the loan off early, usually by selling or refinancing, you owe a fee. It is meant to protect the lender's yield during the first years.

A common structure steps down over time. For example, five percent of the balance if you pay off in year one, four percent in year two, and so on until it reaches zero. A three year structure is also common. Check which one your loan uses before you sign.

Planning around it

If you plan to sell in two years, a long penalty can cost real money. In that case ask for a shorter schedule, even if the rate goes up slightly. If you plan to hold for a decade, the penalty barely matters and a lower rate with a longer schedule can be the better trade.

Reserves are not a fee, but plan for them

Lenders often require several months of payments in reserve after closing. The money stays yours. It just has to be in the account. Count it in your cash needs so the number at the start of the deal is honest.