Do Non-QM Loans Have Prepayment Penalties? What You Need to Know
This is one of the most important questions to ask when considering a Non-QM loan — and one that often gets glossed over. Yes, Non-QM loans can carry prepayment penalties. Understanding how they work and when they apply will help you make an informed decision.
What Is a Prepayment Penalty?
A prepayment penalty is a fee charged if you pay off your loan — either by selling, refinancing, or making large unscheduled principal payments — before a specified period ends. On Non-QM loans, these penalties are structured to protect lenders who price loans for a minimum hold period.
How Non-QM Prepayment Penalties Are Structured
Non-QM prepayment penalties are offered in terms of 1, 2, 3, 4, or 5 years and typically use one of two penalty structures:
| Structure | How It Works |
|---|---|
| Percentage-based (Step-Down) | A percentage of the prepaid amount, declining each year. Example: 5%–4%–3%–2%–1% over a 5-year term |
| 6 Months Interest | A fee equal to 6 months of interest on the amount prepaid beyond the annual 20% allowance |
When Prepayment Penalties Apply
The penalty applies any time unscheduled principal is received within the penalty term — including when the loan is paid off in full (sale or refinance). On the 6-month interest structure, you can prepay up to 20% of the original loan balance per year without triggering a penalty; amounts above that threshold are subject to the fee.
When Prepayment Penalties Are NOT Allowed
Prepayment penalties are generally not permitted on:
- Primary residences (varies by state and program — confirm with your loan officer)
- Second homes
- Investment property cash-out transactions where proceeds are used for personal purposes
DSCR programs and other investment-purpose loans are where prepayment penalties most commonly appear, since these are treated as business-purpose loans outside of standard consumer protections.
Why Non-QM Loans Carry Prepayment Penalties
Non-QM loans are priced with a premium to account for the additional risk and flexibility of the program. Prepayment penalties allow lenders to offer more competitive rates to borrowers who commit to holding the loan for a defined period. Borrowers who want no prepayment penalty can usually choose a zero-penalty option — typically at a slightly higher rate.
Key Takeaways
- Non-QM loans can carry prepayment penalties of 1–5 years
- Two structures: percentage step-down (e.g., 5%–4%–3%) or 6 months of interest on excess prepayments
- Penalties most commonly apply to investment/DSCR loans, not primary residence consumer loans
- Zero-penalty options are available — typically at a slightly higher rate
- Always review your Loan Estimate and Note for the exact penalty structure before closing
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