How lenders size a commercial mortgage (LTV, DSCR, debt yield)

A commercial lender runs three tests on your property and lends the smallest of the three answers. Value sets one limit and income sets the other two; the interest rate changes one of those every day. Knowing which test binds tells you what to fix.

The three tests

Loan-to-value (LTV). Loan divided by the property’s appraised value. Freddie Mac’s April 2026 term sheet caps most of its fixed-rate loans at 80%. The interagency supervisory guidelines (12 CFR 365, Appendix A) set 85% as the limit for improved property, with room for exceptions, and banks set their own limits at or below it.

Debt service coverage (DSCR). Net operating income divided by a year of loan payments. At 1.25x, every dollar of mortgage payment needs $1.25 of income behind it. This is the only test where the interest rate matters.

Debt yield. Net operating income divided by the loan. It ignores rate and amortization entirely, which is why CMBS lenders like it: a loan sized on debt yield can’t be inflated by a low rate or a long interest-only period.

A worked example

Take a property worth $10,000,000 with $650,000 of net operating income, a 6.5% cap rate. Say a lender’s limits are 75% LTV, 1.25x DSCR and a 9% debt yield, and its rate is 6.50% on a 30-year amortization.

Test	Math	Loan allowed
LTV at 75%	$10,000,000 × 0.75	$7,500,000
DSCR at 1.25x	$650,000 ÷ 1.25 = $520,000 a year for debt service; at 6.50% on 30 years each loan dollar costs 7.585 cents a year	$6,855,800
Debt yield at 9%	$650,000 ÷ 0.09	$7,222,200

The loan is $6,855,800, set by DSCR. Asking for $7.5 million because the LTV allows it gets you nowhere; at that size the coverage would be 1.14x.

Why rising rates shrink loans

Run the same property at 7.25% instead of 6.50%. The annual cost per loan dollar rises to about 8.186 cents, and the DSCR loan drops to $6,352,200. The value didn’t change, the income didn’t change, and the loan shrank by about $500,000. LTV and debt yield gave the same answers as before.

That’s why the 10-year Treasury matters so much. Most fixed-rate commercial loans price as a spread over it, so a 50 bps move in Treasuries moves your rate by about the same amount, and moves your loan size with it.

What you can change

• Amortization. Interest-only lowers the payment and raises the DSCR loan. At 6.50% interest-only, the same $520,000 of debt service supports $8,000,000, so LTV binds instead. Many lenders test DSCR on an amortizing payment anyway; Freddie Mac’s term sheet says so explicitly.
• Lender type. Limits differ a lot. FHA 223(f) allows 85% LTV and 1.176x DSCR on market-rate apartments; a life company may price best at 50% to 60%.
• The income. Lenders underwrite their own NOI, usually lower than yours: market vacancy, a management fee even if you self-manage, replacement reserves. Ask what NOI they used before you argue about the rate.

The loan sizer runs all three tests with each lender type’s limits and today’s index rates.