When a lender sizes a commercial loan, they don’t just look at loan-to-value. Two income tests usually set the real ceiling: DSCR and debt yield. Knowing which one is binding tells you how much you can actually borrow.
What each one measures
DSCR (debt service coverage ratio) = NOI ÷ annual debt service. It asks how comfortably the income covers the loan payment. A 1.25 DSCR means $1.25 of NOI for every $1.00 of payment.
Debt yield = NOI ÷ loan amount. It asks what return the lender would earn if they foreclosed and owned the property outright. Crucially, it ignores interest rate and amortization entirely.
Side by side
| DSCR | Debt yield | |
|---|---|---|
| Formula | NOI ÷ debt service | NOI ÷ loan amount |
| Affected by rate & term? | Yes | No |
| Typical minimum | ~1.20–1.25 | ~9–10% |
| What it protects against | Payment shortfall | Overleverage regardless of rate |
| Why lenders like it | Cash-flow cushion | Can’t be gamed by cheap debt |
Why debt yield exists
DSCR and LTV both improve when rates fall or amortization stretches — which is exactly when lenders worry about overleverage. Debt yield doesn’t move with rate or term; it’s pure income over loan. That makes it a rate-proof floor, and in low-rate environments it’s often the test that actually caps your proceeds.
Worked example
A property has $200,000 NOI. At a 1.25 DSCR and a 7% / 25-year loan, the payment math might support a ~$2.2M loan. But at a 10% debt yield minimum, the lender caps the loan at $2,000,000 ($200,000 ÷ 10%). Debt yield is the binding constraint — you get the smaller of the two. Lower the rate and DSCR would allow even more, but debt yield wouldn’t budge.
The takeaway
Check both before you assume a loan amount. Whichever is more restrictive wins, and in cheap-money markets that’s usually debt yield. Run the numbers in the DSCR calculator and debt yield calculator, and cross-check your maximum against the LTV calculator.
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DSCR Calculator →Debt Yield Calculator →LTV Calculator →