The Quick Read: A declining exit fee fits most investors on a five-year DSCR note, because the cost is written into the note on day one and shrinks each year. A make-whole fits only a borrower who is confident of holding the loan to term, since its cost moves with market rates at payoff.
- A declining fee is a fixed percentage of the balance that steps down by loan year.
- A make-whole is a formula tied to Treasury yields, so the cost is unknown until payoff.
- Neither one changes how the file qualifies, because DSCR compares rent to PITIA only.
- Both can be placed through the wholesale network, and the note’s wording controls.
- The payoff year and the rate move decide which structure costs less.
This piece covers loan prepayment structures only. It does not cover vendor, telecom or fund exit fees.
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Who Each Option Is Really For
The declining exit fee is for the investor who might sell, refinance or restructure inside five years and wants a known worst case. Practitioner glossaries describe it as the dominant format on DSCR notes, and that matches what comes across the desk on most files.
The make-whole is for the investor who expects to hold to maturity and wants the loan to behave like a term instrument. Make-whole is uncommon on standard DSCR paper. It shows up more on portfolio and commercial structures. A borrower who sees one on a term sheet should read the formula before anything else.
Neither choice is about approval. Qualification runs primarily on property-level rental income covering the payment, subject to lender guidelines. The exit structure is a cost that arrives later.
Side-by-Side
The make-whole column below reflects published industry norms. The declining-fee column reflects the same. Every note is read on its own terms.
| Factor | Declining Exit Fee | Make-Whole |
|---|---|---|
| Cost basis | Fixed percentage of balance, set in the note | Formula on remaining payments and a Treasury-based discount |
| Predictability | Known on closing day | Known only at payoff |
| Depends on market rates | No | Yes |
| Review basis | Rent vs. PITIA, same as any DSCR file | Rent vs. PITIA, same as any DSCR file |
| Documentation | Note plus prepayment rider | Note plus rider spelling out benchmark and spread |
| Property types | Standard investment property types | Standard investment property types |
| Entity vesting | LLC vesting common, subject to program eligibility | LLC vesting common, subject to program eligibility |
| Reserve expectations | Set by the loan, not the exit structure | Set by the loan, not the exit structure |
| Cost over time | Falls on a schedule | Shrinks as the term runs down |
| Typical home | Standard DSCR term notes | Portfolio and commercial-style paper |
Reserves, entity vesting and property eligibility follow the loan program, not the prepayment clause. Reserves commonly run around 6 months of PITIA and vary by lender, leverage and loan size. A few property types, including manufactured homes, log homes and barndominiums, are not offered in the network regardless of exit structure.
How Each Fee Is Calculated
A declining schedule is stated plainly in the note. REI Prime’s glossary gives 5-4-3-2-1 as the usual example: 5% of the balance in year one, falling a point a year to 1% in year five, then zero. The fee is charged on the outstanding balance, not the original amount. Confirm that in the note. Variants exist. Some schedules are shorter, and some hold at a floor percentage and never reach zero inside the term.
The make-whole runs in four steps:
1. Take the remaining scheduled payments from the payoff date forward.
2. Choose a reinvestment rate. This is typically the Treasury yield matching the remaining term, sometimes plus a spread.
3. Discount those payments to present value at that rate.
4. Subtract the outstanding principal. The excess is the premium.
Cbonds describes the bond-market version as a lump sum equal to the net present value of remaining coupons and principal. Loan versions borrow that logic. Some notes add a floor on the premium. Pensford notes that make-whole and yield maintenance are often used interchangeably but differ in derivation. Treat them as close cousins, not twins, and read the actual wording.
Defeasance is a third thing. It substitutes collateral and keeps the loan alive. It is not a cash penalty and belongs to securitized commercial loans.
When the Declining Exit Fee Is the Better Fit
Pick the declining fee when any of these describe the plan:
- A sale is possible in years one through four. The worst case is a known percentage of a known balance.
- A refinance could make sense. A BRRRR-style rate-and-term refinance or a cash-out refinance after seasoning (about 6 months is the common expectation, with cash-out leverage around 75% LTV) can be priced into the plan before closing.
- The portfolio has several notes. Matching schedules make sale and refinance decisions simpler. Mixed structures complicate them.
- The investor wants no rate-direction bet. A step-down does not care where Treasuries go.
The trap is the schedule itself. Check whether the fee runs on the original balance or the unpaid balance. Check for a floor that never reaches zero. Check whether the schedule is five years or a shorter window. Also ask about partial paydown allowances. Some notes permit limited annual paydowns without a fee, and YieldStack cites 20% of the original balance per year as one market example. That is one lender’s norm, not a network rule.
Lendmire’s piece How to Time a Sale Around Yield Maintenance on a Five-Year DSCR Note covers the formula-based side in more depth.
When the Make-Whole Is the Better Fit
Pick the make-whole when the investor expects to hold the note to term and the structure buys something in return. That could be a leverage tier, a longer term or a portfolio-style product. Past year five on a five-year note, neither fee applies. The make-whole also shrinks as remaining payments run off, so a borrower who holds three or four years has less exposure than one who exits in year one.
The risk is rate direction. Assets America explains that falling rates raise the cost because the lender relends the prepaid money at a lower yield. When rates have risen since closing, the premium can be small or near zero, depending on the floor in the note. So the make-whole costs the most at the exact moment a refinance looks attractive.
Run the logic on one hypothetical five-year note in year two. If Treasuries have fallen since closing, the make-whole premium can exceed what a 5-4-3-2-1 schedule would charge in year two. If Treasuries have risen, the make-whole can come in lower. The declining fee lands in the same place either way. That is the whole trade: certainty against a rate bet.
One more case. An investor with strong credit (700+ unlocks the strongest leverage tiers) and a plan to hold through maturity has little reason to fear either structure. The structure matters for the investor whose plan can change.
What Neither Structure Changes
DSCR compares rent to PITIA only. A prepayment penalty is an exit cost, so it never enters the coverage calculation. Clearing 1.00 is also not the same as positive cash flow. Repairs, vacancy, management, utilities and capex sit outside the ratio. 1.00 is where many select programs start, and a separate select-lender path takes coverage below 1.00 with leverage and terms adjusted.
Leverage, credit floors, reserves and property eligibility follow the program. Most purchase files land at 75%–80% LTV on investment property. Credit floors start at 620 in parts of the network, with most programs wanting around 660. Loans run up to $3,000,000 on standard programs (smaller balances available through select lenders), and above $2,500,000 the network generally holds to 30-year fixed structures. Program terms change and every file is reviewed individually, subject to lender guidelines.
Business-Purpose Loans and State Rules
DSCR loans are designed for non-owner-occupied investment properties. Because they are business-purpose investor loans, they are reviewed differently from a standard owner-occupied mortgage. The consumer prepayment limits in CFPB § 1026.43 apply to covered consumer transactions secured by a dwelling. The NCUA’s Regulation Z guide lays out the consumer caps, which do not govern business-purpose DSCR loans.
State law and program rules still matter. AAPL says prepayment penalties are typically enforceable against LLCs and other business entities, with state rules varying by property type, occupancy and timing. Lenders and counsel decide business-purpose status on a given loan. Check the state and the program before relying on any structure, and expect a state disclosure on some files.
Reading the Note Before You Sign
Most of the trouble sits in four places:
- The prepayment rider. It controls the structure. The term sheet should name it.
- The base. Original balance or unpaid balance.
- The trigger. Sale, refinance, full payoff or a large partial paydown.
- The make-whole inputs. Reference Treasury, spread, floor and calculation date.
Ask for a written payoff method before closing, not after the sale contract is signed. Files where the exit clause was never read are the ones that surprise the borrower later.
Tax treatment varies; consult a qualified professional.
DSCR vs. conventional financing
There are two common ways to finance an investment property, and they qualify you differently — here’s how investors weigh them.
Why investors choose it
- Qualifies on the property’s rental income — no personal tax returns, W-2s, or pay stubs needed to document income.
- No personal debt-to-income ceiling to clear, so existing mortgages and obligations don’t cap your borrowing the same way.
- Can be closed in an LLC, keeping the property inside a business entity.
- Built for scaling — not held to the limit on number of financed properties that conventional financing applies.
- Underwriting centers on the deal: generally qualifies when the rent covers the payment, a 1.00x coverage ratio being a common baseline (confirmed in underwriting).
- Designed specifically for investment property, including long-term and, where the program allows, short-term rentals.
Where it’s strong
- Often the lowest ongoing financing cost for a buyer who fully qualifies on personal income — a fit for a first property or a cost-first purchase.
Trade-offs for investors
- Requires full personal income documentation and must fit within a debt-to-income limit — salary, existing debts, and other mortgages all count.
- Typically held in your personal name rather than a business entity.
- Caps how many financed properties you can carry, which can become a ceiling as a portfolio grows.
- Evaluates you as a borrower as much as the property, which usually means more paperwork.
How investors usually choose: a first or single property often optimizes for the lowest financing cost; portfolio builders often optimize for leverage, vesting in an LLC, and scaling past conventional caps. The right answer depends on your goals, the property, and current guidelines — both paths run through select lenders in Lendmire’s wholesale network, with eligibility and terms confirmed in underwriting.
The Balanced Verdict
For a five-year DSCR note, the declining exit fee is the default choice for any investor whose plan could move. It costs something known and shrinks on schedule. The make-whole suits the borrower who is sure of the hold and who accepts rate risk in exchange for what the structure brings elsewhere in the loan. Neither beats the other in every financing environment, and the better choice is the one that matches the real exit plan.
Lendmire’s complete DSCR loans guide covers how coverage, leverage and reserves fit together. If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals. It is not a commitment to lend.
Key Terms Defined
Declining exit fee: A prepayment charge set as a percentage of the balance that falls by loan year.
Make-whole: A lump-sum payoff premium based on the present value of remaining payments, discounted at a Treasury-based rate.
Yield maintenance: A close cousin of make-whole that compares the note rate to a Treasury yield for the remaining term.
Defeasance: A collateral substitution that keeps the loan alive instead of paying a cash premium.
PITIA: Principal, interest, taxes, insurance and association dues, the payment that rent is measured against.
Frequently Asked Questions
Is make-whole the same as yield maintenance?
Not exactly. They are often used interchangeably, but the derivation can differ. Read the note’s wording for the benchmark, spread and floor.
Is the declining fee charged on the original or the unpaid balance?
Usually the outstanding balance, but the note controls. Confirm it in the rider before signing.
Can a make-whole come out near zero?
Yes, when rates have risen since closing, because the lender can relend at a higher yield. A floor in the note can set a minimum premium, and a floor of 1% of balance is one market example.
Do small paydowns trigger the fee?
Many notes allow limited annual paydowns without a fee, but terms vary by note. Check the allowance and how it is measured.
Does the exit structure affect DSCR lender review?
No. Qualification compares rent to PITIA. The exit fee is a cost at payoff, not a monthly one.
For current guidelines and terms, see Lendmire’s DSCR loan programs page.
About Lendmire
Lendmire is a DSCR-focused mortgage brokerage, NMLS# 2371349, placing investor loans across 41 markets, including Washington, D.C. DSCR eligibility is generally reviewed by the lender around a property’s rental income rather than personal income documentation, which fits LLC-held rentals, self-employed investors, and portfolios scaling past conventional financed-property limits. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. REI Prime: Prepayment Penalty
2. Cbonds
3. Pensford: Defeasance vs. Yield Maintenance
4. YieldStack: Prepayment Penalty
8. AAPL: Prepayment Penalty Rules for LLC Borrowers
This article is part of Lendmire’s DSCR loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Is a 30-Year DSCR Loan Safer for an LLC Portfolio With 10+ Doors? · Does a DSCR Takeout of Hard Money Loans Need a Year of Ownership? · Can a Single-Family Hard Money Bridge Loan Exit Into a DSCR Loan?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.