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 →Frequently asked questions
What’s the difference between DSCR and debt yield?
DSCR is NOI divided by the annual loan payment and depends on rate and amortization; debt yield is NOI divided by the loan amount and ignores rate and term entirely. Lenders use both and lend the lower of the two.
Why do lenders use debt yield instead of just DSCR and LTV?
Because DSCR and LTV both improve when rates drop or terms lengthen, which can mask overleverage. Debt yield is rate-proof — it measures income relative to the loan regardless of financing terms — so it’s a stable floor across market cycles.
What debt yield and DSCR do I need?
Most commercial lenders want a minimum debt yield around 9–10% and a DSCR of at least 1.20–1.25 for stabilized assets, with higher thresholds for riskier property. The stricter of the two sets your maximum loan.