Interpret the result
How Lenders Read Your Numbers
Lenders size a commercial loan with three tests and lend the smallest answer. Here is what each one means, where lenders usually draw the line, and why a long amortization still leaves a large payoff at maturity.
Debt coverage (DSCR)
Net operating income ÷ annual loan payments. The test that most often sets the loan amount.
Most lenders want 1.20x to 1.25x, higher for hotels and other specialty properties. Below 1.00x, the property doesn't cover its own payment.
Debt yield
Net operating income ÷ loan amount. Ignores the interest rate and the appraisal.
Many lenders set a floor around 8% to 10%. Because it ignores the rate, buying down the rate can raise your DSCR loan amount without moving this one, so debt yield often sets the loan on rate-bought-down deals.
Loan-to-value (LTV)
Loan amount ÷ appraised value or purchase price, whichever is lower.
Typical maximums run 65% to 75% for most commercial property and up to 80% for stabilized apartments. On a well-leased property, coverage usually limits the loan before LTV does.
Term vs. amortization
Amortization sets the payment. The term sets when the loan comes due.
On a $1.5M loan at 6.5% amortized over 25 years, the payment is about $10,128 a month. At the end of a 10-year term, about $1.16M is still owed and must be refinanced or paid off, at whatever rates exist then.
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