DSCR, LTV, and Debt Yield: How Lenders Size Your Loan

Three numbers decide your proceeds

Nearly every commercial mortgage quote is the output of three constraints: debt service coverage ratio (DSCR), loan-to-value (LTV), and, increasingly, debt yield. Lenders calculate all three and lend to whichever is most restrictive. Understanding that mechanism explains most of the difference between the loan you want and the loan you are offered.

DSCR: can the property pay the mortgage?

DSCR is net operating income divided by annual debt service. A 1.25x DSCR requirement means the property must generate 25% more cash flow than the mortgage payment. Example: a property with $650,000 of NOI, underwritten at a 1.25x DSCR, supports annual debt service of $520,000. At a given rate and a 30-year amortization, that payment backs into a specific maximum loan amount. Lower rates, longer amortization, or interest-only periods raise the loan that a fixed NOI can carry, which is why the same property supports very different proceeds across executions.

LTV: how much cushion does the lender have?

LTV is the loan amount divided by appraised value. An 80% maximum LTV on a $9 million property caps the loan at $7.2 million regardless of cash flow. LTV protects the lender against value decline; DSCR protects against cash flow decline. On low-cap-rate properties, DSCR usually binds before LTV. On high-cap-rate properties, LTV often binds first.

Debt yield: the cycle-proof check

Debt yield is NOI divided by loan amount, ignoring rate, amortization, and appraisal entirely. A $6.5 million loan on $650,000 of NOI is a 10% debt yield. Because it cannot be flattered by cheap debt or an aggressive appraisal, CMBS lenders and many institutional lenders apply a minimum debt yield as a floor on top of DSCR and LTV tests.

The binding constraint sets the loan

Run all three tests and the smallest answer is your loan. That is exactly how our deal sizer works: it solves the DSCR constraint and the LTV constraint from your inputs and reports which one binds. It is also why "what leverage can I get?" has no single answer. The binding constraint shifts with rates, NOI, market cap rates, and the execution you choose.

How to move the number

If proceeds are short, the levers are: documentable NOI (contracts, recent leases, expense corrections an underwriter will accept), longer amortization or interest-only where the program allows it, a lower rate through competition among lenders, or an execution with different constraints altogether. The last lever is usually the biggest. The spread between the most and least aggressive credible quote on the same deal is routinely wider than any single underwriting adjustment, which is why we run every mandate across the whole market rather than one lender's box.

For quick checks alongside the sizer, our affiliated publishing site CommercialRealEstate.loans maintains free standalone tools: a DSCR calculator, a debt yield calculator, and a full commercial mortgage calculator.

General information, not financial, legal, or tax advice. Program parameters change over time; actual terms are set by lenders at quote. See our Terms of Use.