How commercial lenders size a loan: DSCR, LTV and debt yield
Commercial lenders run three tests and lend the smallest amount any of them allows. Knowing which test limits you tells you how to borrow more.
Updated Oct 29, 2026
The property qualifies, not just you
With a home loan, the bank mostly looks at your income. With a commercial loan, it looks at the property's income: its net operating income (NOI). Each lender has three rules, and each rule gives a maximum loan. You get the smallest of the three.
Rule 1: debt service coverage ratio (DSCR)
Largest yearly payment = NOI ÷ minimum DSCR
If the lender wants a DSCR of 1.25, the loan payments can be at most NOI ÷ 1.25. The loan is whatever that payment pays off over the amortization at your rate. Higher rates mean a smaller loan under this rule.
Rule 2: loan-to-value (LTV)
Largest loan = price (or appraised value) × maximum LTV
Commercial lenders usually cap LTV between 65% and 80%, depending on the property type and the lender.
Rule 3: debt yield
Largest loan = NOI ÷ minimum debt yield
Debt yield is NOI as a percentage of the loan. A 9% minimum means the property must earn at least 9% of the loan amount each year. It ignores rates and amortization, so lenders like it as a check that can't be stretched by a low rate or a long amortization. Many banks don't use it; CMBS lenders and debt funds often do.
A worked example
A $1,700,000 retail strip with NOI of $118,700. The loan is at 7% with a 25-year amortization, and the lender wants a 1.25 DSCR, at most 75% LTV and at least a 9% debt yield.
| DSCR: $118,700 ÷ 1.25 = $94,960/yr ($7,913/mo) of payments | $1,119,633 |
|---|---|
| LTV: $1,700,000 × 75% | $1,275,000 |
| Debt yield: $118,700 ÷ 9% | $1,318,889 |
| Maximum loan (the smallest) | $1,119,633 |
| Down payment ($1,700,000 − $1,119,633) | $580,367 |
The DSCR rule binds. Even though the lender would allow 75% LTV, the income only supports a loan of about 66% of the price. The buyer needs about $580,000 down, plus closing costs, not the $425,000 that “25% down” suggests.
How to borrow more, depending on the rule
- DSCR binds: raise NOI, get a lower rate, or ask for a longer amortization or some interest-only years.
- LTV binds: only a higher appraisal or a lower price helps. The rest has to be your down payment (or a second lender).
- Debt yield binds: only higher NOI helps.
When rates are high, DSCR usually binds. When rates are low, LTV or debt yield usually does. Try it with your own numbers in the loan sizing calculator.
Common mistakes
- Using the seller's NOI. Lenders build their own, usually with higher vacancy, a management fee even if you self-manage, and reserves. Their NOI is often lower.
- Assuming the maximum LTV. In the example, the LTV limit was never reached.
- Forgetting the balloon. Most commercial loans come due in 5–10 years; see balloon loans.
Frequently asked questions
- What DSCR do commercial lenders require?
- Commonly 1.20 to 1.35, depending on the property type, the lender and the loan program. Riskier property types such as hotels usually need more.
- What is a good debt yield?
- Many lenders that use it want 8% to 10% or more. It varies with the property type and the market. A higher debt yield means a safer loan for the lender.
- Why is my commercial loan smaller than 75% of the price?
- Usually because the DSCR or debt yield rule gives a smaller loan than the LTV rule. The property's income can't support a bigger loan at today's rate, so the lender lends the smaller amount.
- Does my credit score matter for a commercial loan?
- Yes, but less than with a home loan. Lenders also look at your net worth, cash reserves and experience owning similar property. The property's income decides most of the loan size.
Keep reading
For education only. Not financial, tax or legal advice; talk to a qualified professional about your situation.