Commercial Real Estate Loan Requirements: DSCR, LTV, Debt Yield
Every commercial real estate lender runs the same three tests before approving a loan: debt service coverage ratio (DSCR), loan-to-value (LTV), and debt yield. Each measures risk from a different angle, and lenders don’t pick a favorite and ignore the rest. They run all three, then size the loan to the most restrictive result. If you’re underwriting a deal, refinancing, or just trying to figure out how much a lender will actually lend against a property, run the same three tests before you pick up the phone with a lender.
This guide walks through each metric, what a normal lender requirement looks like, and a full worked example showing how the three tests interact to set your actual loan amount.
The Short Version: Lenders Take the Lowest Number
Commercial lenders don’t lend a flat percentage of purchase price the way residential mortgages work. They calculate the maximum loan supported by each of the three tests independently, then use whichever one produces the smallest loan amount. That smallest number is your binding constraint.
- DSCR answers: does the property’s income cover the loan payment with enough cushion?
- LTV answers: how much equity cushion does the lender have if the property loses value?
- Debt yield answers: if the lender had to foreclose and sell today, how exposed is the loan balance?
A deal can look fine on LTV and still fail on DSCR, or clear DSCR easily and still get capped by debt yield. You want to know all three before you negotiate terms, not after a term sheet comes back lower than you expected.
Debt Service Coverage Ratio (DSCR)
DSCR measures how many times the property’s net operating income covers the annual mortgage payment.
Formula: DSCR = Net Operating Income ÷ Annual Debt Service
Net operating income (NOI) is rental income plus other property income, minus operating expenses, calculated before debt service, capital expenditures, and income taxes. Annual debt service is the total principal and interest due on the loan for the year (interest-only loans use interest alone during the IO period).
A DSCR of 1.00x means the property’s income exactly matches the mortgage payment, with nothing left over for vacancy, unexpected repairs, or owner distributions. Lenders build in a cushion above 1.00x, and the required minimum varies by property type and loan program:
- Multifamily (agency, Fannie Mae / Freddie Mac): typically 1.20x to 1.25x for stabilized properties
- Office, retail, industrial (bank or life company): typically 1.25x to 1.35x
- Hotels: typically 1.35x to 1.50x, reflecting more volatile income
- Bridge and construction loans: often underwritten to a stabilized DSCR rather than in-place, sometimes paired with an interest reserve
Worked Example: DSCR
A property has $540,000 in annual NOI. The lender requires a minimum 1.30x DSCR and is quoting 6.75% interest on a 25-year amortization schedule, which produces an annual mortgage constant (the annual debt service per dollar of loan) of approximately 8.29%.
- Maximum allowable annual debt service = $540,000 ÷ 1.30 = $415,385
- Maximum loan amount = $415,385 ÷ 0.0829 = $5,010,000 (rounded down to the nearest thousand)
Check the math: $5,010,000 × 0.0829 = $415,329 in annual debt service, and $540,000 ÷ $415,329 = 1.30x. That’s the largest loan this income stream supports under the DSCR test alone.
Run your own numbers against actual quoted rates and amortization schedules with the DSCR & loan-sizing calculator. It solves for the max loan and shows you which cap would bind before you’re sitting across from a lender.
Loan-to-Value (LTV)
LTV measures the loan amount against the value of the collateral.
Formula: LTV = Loan Amount ÷ Property Value
The lender uses the lesser of appraised value or purchase price, not whichever number is more favorable to the borrower. If you’re under contract at $9.2 million and the appraisal comes back at $9.0 million, the lender lends against $9.0 million. You either bring more equity to close, renegotiate price, or challenge the appraisal.
Typical maximum LTV ranges:
- Conventional bank and life company loans: 65% to 75% for stabilized, income-producing assets
- Agency multifamily: up to 75% to 80% depending on program and DSCR
- CMBS conduit loans: typically 60% to 75%
- Construction and value-add bridge loans: often capped lower on LTV but higher on loan-to-cost (LTC), commonly 60% to 70% of total project cost
Worked Example: LTV
You’re under contract to buy a property for $9,200,000. The appraisal comes in at $9,000,000. The lender’s program caps at 70% LTV.
- Lender uses the lesser of contract price and appraised value: $9,000,000
- Maximum loan = $9,000,000 × 0.70 = $6,300,000
- Required equity = $9,200,000 (actual purchase price) minus $6,300,000 (loan) = $2,900,000
The $200,000 appraisal gap comes entirely out of your equity, on top of the normal down payment. This is one of the most common places deals get repriced late in the process, so order the appraisal early and stress-test your equity assumptions against a value that comes in under contract.
Check your own LTV, max loan, and required down payment with the LTV calculator.
Debt Yield
Debt yield measures the lender’s income return on the loan balance itself, independent of interest rate, amortization period, or assumed cap rate.
Formula: Debt Yield = Net Operating Income ÷ Loan Amount
Debt yield became standard underwriting practice across the industry after the 2008 financial crisis, largely pushed by CMBS lenders who wanted a sizing test that couldn’t be stretched by extending amortization or betting on a low cap rate at exit. LTV depends on an appraisal, which depends on a cap rate assumption. DSCR depends on the interest rate and amortization schedule, both of which lenders set. Debt yield strips that out and asks a simpler question: if this loan went bad tomorrow and the lender had to take the property back, what’s the income return on the money they have out?
Typical minimum debt yield requirements run 8% to 10% for CMBS and bank loans on stabilized commercial property, with some lenders pushing toward 10%+ on riskier property types or in tighter credit cycles.
Worked Example: Debt Yield
A property generates $380,000 in NOI. You’re requesting a $4,100,000 loan, and the lender’s minimum debt yield is 9%.
- Debt yield = $380,000 ÷ $4,100,000 = 9.27%
This loan clears the lender’s floor, but not by much. If NOI comes in even 3% below projection at closing, the deal drops below 9% and the lender either resizes the loan down or requires additional equity. Debt yield is usually the tightest test on deals built around aggressive income projections, which is exactly why lenders lean on it.
Model debt yield alongside loan-to-cost with the loan-to-cost and debt yield calculator.
Putting It Together: A Full Loan-Sizing Example
Here’s a single deal run through all three tests, the way a lender’s underwriter would actually size it.
The deal: A 40-unit multifamily property, purchase price and appraised value both $6,000,000, in-place NOI of $420,000 (a 7.0% going-in cap rate). The lender quotes 7.00% fixed interest on a 25-year amortization schedule, an annual mortgage constant of approximately 8.48%. Program requirements: max 70% LTV, min 1.25x DSCR, min 9% debt yield.
| Test | Calculation | Max Loan Supported |
|---|---|---|
| LTV (70% max) | $6,000,000 × 0.70 | $4,200,000 |
| DSCR (1.25x min) | ($420,000 ÷ 1.25) ÷ 0.0848 | $3,962,000 |
| Debt Yield (9% min) | $420,000 ÷ 0.09 | $4,666,000 |
The DSCR test produces the lowest number, so it’s the binding constraint. The loan gets sized to $3,962,000, not $4,200,000. At that loan amount, the actual metrics come out to a 66.0% LTV, a 1.25x DSCR (right at the floor), and a 10.6% debt yield, comfortably above the 9% minimum.
Notice what happened: LTV had room to spare and debt yield had even more room, but DSCR was the tightest constraint and it set the ceiling for everyone else. That’s normal. On most deals, one test binds and the other two aren’t close.
Why DSCR Has Been the Binding Constraint More Often Lately
Which test binds shifts with the rate environment. When interest rates are low and cap rates are compressed, LTV tends to be the tightest test, because the mortgage constant is small relative to NOI and DSCR clears easily even at high leverage. When benchmark rates rise faster than cap rates adjust, the mortgage constant climbs and DSCR tightens even though the property’s value and income haven’t changed. That’s the pattern brokers and lenders have described repeatedly since the 2022-2023 rate cycle: deals that would have supported 70% to 75% leverage on an LTV basis alone got capped well below that on DSCR, because the higher rate ate into the coverage cushion faster than values adjusted.
The practical takeaway: don’t assume your leverage is set by the LTV cap quoted on a rate sheet. Run the DSCR and debt yield math against the actual quoted rate before you build a proforma around a loan amount that assumes maximum LTV.
Common Mistakes Worth Avoiding
- Using trailing NOI instead of the lender’s underwritten NOI. Lenders normalize NOI (reserves for replacement, market vacancy, sometimes a management fee even if you self-manage) before running any of these tests. Their number is almost always lower than your trailing twelve months.
- Ignoring interest-only periods. DSCR during an IO period looks much better than DSCR once amortization starts. If your loan converts from IO to amortizing, run the ratio both ways.
- Assuming the appraisal will match the contract price. It routinely doesn’t, especially in a market where cap rates are moving. Build a contingency into your equity plan for a lower appraised value.
- Sizing off one test and skipping the other two. A deal that clears LTV can still fail debt yield, particularly on properties trading at aggressive cap rates.
These three tests aren’t independent hurdles you clear once and forget. They interact, and which one binds on your deal depends on the specific combination of NOI, value, and quoted loan terms you’re working with. Run all three before you make an offer, not after you’re already under contract.
Frequently Asked Questions
What’s a good DSCR for a commercial loan?
Above the lender’s stated minimum with room to spare. A 1.25x-1.35x DSCR is comfortable for most stabilized property types; anything under 1.20x is tight even if it technically clears the floor, because it leaves almost no cushion for a bad year of vacancy or a rate reset on a floating-rate loan.
Can you get a commercial loan with a DSCR below 1.0?
Not on permanent, stabilized financing. A sub-1.0x DSCR means the property’s income doesn’t cover the debt payment, and no conventional lender sizes a loan that way. Bridge and construction lenders sometimes underwrite a property that’s temporarily below 1.0x during lease-up or renovation, but they typically require an interest reserve funded at closing to cover the shortfall until the property stabilizes.
Does a higher LTV automatically mean a bigger loan?
No, and that’s the core point of this guide. LTV sets a ceiling based on value, but DSCR and debt yield can cap the loan lower, especially at today’s higher interest rates. Check all three before assuming a lender’s advertised max LTV is what you’ll actually qualify for.
How is debt yield different from cap rate?
Both use NOI in the numerator, but they divide by different things. Cap rate is NOI divided by property value, and it tells you the going-in return on the full purchase price. Debt yield is NOI divided by loan amount, and it tells the lender their return if they had to take the property back and hold it. A property can have an attractive cap rate and still produce a thin debt yield if the loan amount is large relative to NOI.
The full library of CRE calculators includes dedicated tools for DSCR and loan sizing, LTV, loan-to-cost and debt yield, and mortgage payments, so you can model your specific deal against real lender thresholds before you’re negotiating from a weaker position.