diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabLoader.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabLoader.cpp
index 44dff93cb5..54baeb3f66 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabLoader.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabLoader.cpp
@@ -151,6 +151,10 @@ namespace AzToolsFramework
                 return InvalidTemplateId;
             }
 
+            // Add or replace the Source parameter in the dom
+            PrefabDomPath sourcePath = PrefabDomPath((AZStd::string("/") + PrefabDomUtils::SourceName).c_str());
+            sourcePath.Set(readPrefabFileResult.GetValue(), relativePath.Native().c_str());
+
             // Create new Template with the Prefab DOM.
             TemplateId newTemplateId = m_prefabSystemComponentInterface->AddTemplate(relativePath, readPrefabFileResult.TakeValue());
             if (newTemplateId == InvalidTemplateId)
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Template/Template.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Template/Template.cpp
index 0511ee1f13..592fc309d5 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Template/Template.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Template/Template.cpp
@@ -207,6 +207,10 @@ namespace AzToolsFramework
                 instanceValue->CopyFrom(linkDom, m_prefabDom.GetAllocator());
             }
 
+            // Remove Source parameter from the dom. It will be added on file load, and should not be stored to disk.
+            PrefabDomPath sourcePath = PrefabDomPath((AZStd::string("/") + PrefabDomUtils::SourceName).c_str());
+            sourcePath.Erase(output);
+
             return true;
         }