DSCR, LTV, and debt yield: how lenders size a commercial loan

Ask three lenders how much they will lend on the same property and you may hear three numbers. Behind each one is the same short list of tests. Understand them and you can predict the answer before you apply.

The three tests

Debt service coverage ratio (DSCR). Net operating income divided by the annual loan payment. A 1.25x requirement means income must be 25% higher than the payment. Rate and amortization drive this test, because they set the payment.

Loan to value (LTV). The loan divided by the appraised value or purchase price, whichever is lower. Value comes from the appraisal, not the seller's asking price or your own estimate.

Debt yield. Net operating income divided by the loan amount. It ignores rate and amortization entirely, which is why some lenders like it. It answers one question: if the lender took the property back, what return would the income provide on the money lent?

Whichever is smallest wins

The lender calculates the maximum loan under each test and offers the lowest. That lowest number is called the binding constraint. Knowing which test binds tells you what to work on.

• If DSCR binds, the payment is the problem. A longer amortization, an interest only period, a lower rate, or higher income all help.
• If LTV binds, value is the problem. More equity, a stronger appraisal supported by real comparables, or a different lender with a higher LTV limit are the levers.
• If debt yield binds, income is the problem. Only higher net operating income or a smaller loan will move it.

Start with the right NOI

Most surprises come from the income number, not the math. Lenders underwrite their own version of NOI. Expect them to:

• Use actual trailing collections, not a pro forma.
• Apply a vacancy factor even if the property is full today.
• Add a market management fee, even if you manage it yourself.
• Include replacement reserves.
• Reassess taxes and reprice insurance at today's levels.

If you size the loan on your own optimistic NOI, the lender's number will come back lower. Size it on theirs and there is nothing to explain.

Try it on your own numbers

Our Debt Sizing Calculator runs all three tests at once and shows which one binds. If the answer is not what you hoped, that is the start of a capital plan, not the end of the deal. Schedule a conversation and we can walk through the options.