Prepayment Penalties by State — Non-QM Mortgage Reference

Status: Pending counsel review. This page is staged but not indexed. It contains state-level legal assertions requiring sign-off before publication. See compliance notes below.

A prepayment penalty is a fee charged when a borrower pays off a loan before a specified date — typically within the first 1–5 years of a non-QM loan. These fees are common on DSCR loans, hard money loans, NONI loans, and some bank statement programs. The structure is usually a declining step-down schedule (e.g., 5-4-3-2-1 percent of loan balance, one percentage point per year).

Prepayment penalties are a legitimate lender tool for recovering yield on short-duration loans. For borrowers planning to sell or refinance quickly, understanding your penalty exposure before you close is material to the deal economics.

States Where Prepayment Penalties Are Prohibited or Restricted

The following states prohibit prepayment penalties on certain loan types, including non-QM mortgages secured by residential property. Program availability varies — confirm with your loan officer at application.

New Jersey Footnote ⚠️ UNVERIFIED-PENDING-COUNSEL

Under N.J.S.A. 46:10B-2, New Jersey restricts prepayment penalties on residential mortgage loans. Per July 2025 NJ Department of Banking and Insurance (DOBI) guidance:

• Corporations (C-corp): May carry a prepayment penalty.
• LLC, LP, trust, or individual borrowers: Cannot carry a prepayment penalty on residential mortgage loans.

This interpretation has not been verified by outside counsel and is pending review. Do not rely on this table as legal advice. Confirm applicability with a licensed attorney before any lending decision in New Jersey.

All Other States

Prepayment penalties on non-QM loans are generally permissible in states not listed above, subject to lender program terms. Structure and duration vary by program. Confirm terms at application — your loan estimate will disclose any penalty in writing.

Common structures observed in the market:

• 5-4-3-2-1: 5% of loan balance in year one, declining 1% per year through year five.
• 3-2-1: 3% year one, 2% year two, 1% year three.
• 1-year hard: Flat penalty if paid off within 12 months; no penalty after.
• No PPP: Available on select programs, typically at a rate premium.

How Prepayment Penalties Affect Your Exit Strategy

If you plan to sell or refinance within the penalty window, calculate the payoff cost before you commit:

Penalty cost = loan balance × penalty percentage for that year

Example: $500,000 loan with a 5-4-3-2-1 structure. Payoff in year two = $500,000 × 4% = $20,000. Factor this into your exit analysis, particularly for fix-and-flip, short-term rental, or bridge loan scenarios where the hold period is uncertain.

Contact

For current program terms on your specific loan, call (833) 350-9185 or contact us .

1st Nationwide Mortgage Corporation, NMLS #1281. Equal Housing Lender. This page is for reference only and does not constitute legal advice. State laws are subject to change. Verify current requirements with a licensed attorney in your state.