Prepayment Penalties on Non-QM Loans — What Borrowers Need to Know

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.

Availability Varies — Confirm Before Quoting

Prepayment structures are not available everywhere. Availability and terms vary by state, by loan amount, and by whether the borrower takes title personally or through an entity. We confirm the structure for your state and vesting before quoting.

The authority for any specific loan is the funding lender’s state matrix at lock — not a web page. Do not rely on any published list, including this one.

Common Structures

• 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.