A prepayment penalty is a fee for paying off your mortgage early, usually by selling or refinancing within the first few years. Most home loans don’t have them: FHA, VA and USDA loans can’t, and federal rules sharply limit them on conventional loans. They’re common on non-QM and investor loans, such as DSCR loans, so check page 1 of your Loan Estimate.
Where you’ll find them
| Loan | Prepayment penalty? |
|---|---|
| FHA, VA, USDA | Not allowed |
| Conventional (qualified mortgages) | Rare; only on certain fixed-rate loans, limited to the first three years and capped at 2% of the balance in years one and two and 1% in year three |
| Non-QM and DSCR investor loans | Common, often a step-down like 5%, 4%, 3%, 2%, 1% over five years |
Hard vs. soft penalties
- Hard: applies whether you refinance or sell.
- Soft: applies only if you refinance, not if you sell.
Do extra payments trigger it?
Usually not small extra payments; many penalties allow paying up to 20% of the balance a year without a fee. Read the terms. See the extra payment calculator.
Try it: Refinance break-evenAdd any prepayment penalty to the refinance costs to see if refinancing still pays off.Should you ever accept one?
On an investment property loan, accepting a penalty can lower the rate. If you’re confident you’ll keep the loan past the penalty period, it can make sense; otherwise, choose a loan without one. Compare both versions with compare mortgage offers, and see non-QM loans.
Common questions
Do FHA or VA loans have prepayment penalties?
No. FHA, VA and USDA loans can’t charge them.
Can I make extra payments with a prepayment penalty?
Usually small extra payments are allowed; many penalties permit up to 20% of the balance a year.
Where is the prepayment penalty disclosed?
On page 1 of your Loan Estimate and Closing Disclosure.
Updated October 2026. Educational content. OfferBacked is not currently a lender and doesn’t issue pre-approvals or loans.