Most underwriting explainers define the ratios and stop. But a lender does not admire your ratios — it uses them to size your loan, running three separate tests, taking the smallest answer, and only then moving on to judging you. This page follows one property through the whole sequence with a single consistent set of figures: the income build, the three tests applied to a requested loan, and then the sizing itself, where you can watch the binding constraint do its work. Every number below comes from the same example, so you can check each step against the last. The companion checklist — documents, liquidity, experience, everything the math cannot capture — is the requirements page.
General information, not financial advice.
Net operating income is the property’s income after vacancy and operating expenses, before debt service (the OCC’s definition in its Comptroller’s Handbook — Commercial Real Estate Lending). The example property:
| Line | Amount |
|---|---|
| Gross scheduled rent | $240,000 |
| Less vacancy and credit loss (5%) | −$12,000 |
| Plus other income | +$12,000 |
| Effective gross income | $240,000 |
| Operating expenses — property taxes $30,000 · insurance $15,000 · repairs & maintenance $18,000 · management $12,000 · utilities & other $15,000 | $90,000 |
| NOI | $150,000 |
Now the warning that decides real deals: underwritten NOI is usually lower than the seller’s NOI. The lender normalises the lines owners flatter — a vacancy allowance even on a full building, a management fee even if you self-manage, market-rate taxes and insurance, repairs, and replacement reserves. The seller’s figure is a starting claim; the number in the tests below is the lender’s rebuild.
Suppose you ask for $1,250,000 against this property, valued at $2,000,000, priced at 7% on a 25-year amortisation. The monthly payment is $8,834.74, so annual debt service is $106,016.88. The three tests (definitions per the OCC handbook):
Two of these tests move when pricing changes and one does not. Raise the rate or shorten the amortisation and the payment rises, so DSCR falls — the same property, same loan, worse coverage. Debt yield ignores rate and amortisation entirely: it asks only how much income stands behind each dollar lent. That blindness is exactly why lenders run it beside DSCR — a long amortisation can flatter coverage, but it cannot flatter debt yield.
Here is the step definitions pages skip. The lender does not check whether your request passes; it computes the maximum loan each test allows and lends the lowest. Using one illustrative lender’s constraints — labelled illustrative, because floors and caps are set lender by lender, never by the market: maximum LTV 65%, minimum DSCR 1.25×, minimum debt yield 10%:
| Test | Computation | Maximum loan |
|---|---|---|
| LTV | 65% × $2,000,000 | $1,300,000 |
| DSCR | NOI ÷ 1.25 = $120,000 max annual debt service → loan at 7% / 25-yr amortisation | $1,414,869.03 |
| Debt yield | NOI ÷ 10% = $150,000 ÷ 0.10 | $1,500,000 |
The binding constraint is LTV, at $1,300,000. Your $1,250,000 request fits under all three maxima, so it survives the math — and if you had asked for $1,450,000, the coverage and debt-yield tests would both have allowed it while the LTV cap quietly cut you back to $1,300,000. At that binding loan, the other ratios land where they land: monthly payment $9,188.13, annual debt service $110,257.55, DSCR 1.36×, LTV 65.00%, debt yield 11.54%.
That is the page in one sentence: a lender does not average the three tests — it computes a maximum under each one and lends the lowest, before the borrower and property checks can reduce the figure further.
Each cap also guards a different failure, which is why lenders keep all three rather than picking a favourite. The LTV cap protects the exit — if the loan must be sold out of the property, the value has to cover it. The DSCR floor protects the income statement — the rent has to carry the payment in an ordinary year, not just a good one. The debt-yield floor protects against cosmetic safety: it stays put when a low rate or a long amortisation makes a large loan’s payment look deceptively manageable.
To run your own property through the payment side of this — payment, balloon, LTV and a single-property DSCR/debt-yield readout from your NOI — use the commercial mortgage calculator. Note the difference from the DSCR calculator: that tool measures an operating business’s coverage from EBITDA across all its debts; this page and the mortgage calculator measure one property’s income against one mortgage.
Passing the three tests is necessary, not sufficient. On top of the sized figure the lender applies judgement: borrower strength and post-closing liquidity, sponsor experience with this property type, lease quality and rollover (how soon the rent roll expires — for retail and office deals, the tenancy and WALT side of that question is worked through on financing retail or office property), the property’s condition and market, and whatever the appraisal and environmental review surface. Any of these can trim the loan below the mathematical maximum or end the application. The checklist that prepares you for this layer is the requirements page, and the equity the sizing implies is budgeted on the down payment page.
What is debt yield? NOI divided by the loan amount — here, $150,000 ÷ $1,250,000 = 12.00%. It tells the lender how much property income supports each dollar lent, and because it ignores the interest rate and amortisation, it cannot be improved by stretching the loan’s schedule the way DSCR can.
How is DSCR calculated? NOI divided by annual debt service. In the worked example, $150,000 ÷ $106,016.88 = 1.41× on the requested loan. Change the rate or the amortisation and the debt service — and therefore the ratio — changes with it, which is why lenders quote DSCR against a specific loan structure, not in the abstract.
How is LTV calculated? Loan amount divided by value — $1,250,000 ÷ $2,000,000 = 62.50%. The value is the one the lender accepts, normally the appraisal. If the appraisal lands below the contract price, the same loan produces a higher LTV, and the lender’s maximum shrinks with the denominator.
What is the difference between DSCR and debt yield? DSCR measures coverage of the payment, so it moves with rate and amortisation; debt yield measures income against the loan amount, so it does not. A lender running both is protected against a long amortisation making a large loan look safe on coverage while the income per dollar lent stays thin.
How do lenders size a commercial loan? By computing a maximum loan under each applicable test — LTV cap, DSCR floor, debt-yield floor — and lending the lowest of them, then applying borrower, lease, property and market judgement on top. In the worked example the three maxima were $1,300,000, $1,414,869.03 and $1,500,000, so the loan was sized at $1,300,000: the LTV test bound first.
Sources: OCC, Comptroller’s Handbook — Commercial Real Estate Lending (definitions of NOI, DSCR, LTV and debt yield; sizing to the most restrictive applicable test). Worked example computed at full precision, 2026-10-23; lender constraints in the sizing table are illustrative, as labelled. Currency verified 2026-10-23.