How Lenders Size a CRE Loan: DSCR, LTV, LTC, and Debt Yield

Every lender runs a deal through the same four constraints before agreeing to a loan amount. Knowing how that process works is one of the most important skills in CRE underwriting.

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The Four Constraints Lenders Use

Every commercial real estate lender evaluates a deal through four primary constraints. Each produces a different maximum loan amount, and the lender sizes to the most restrictive result. The max loan is always dictated by the tightest constraint, not the most favorable one.

Throughout this post we will use the same deal to illustrate each constraint:

• Purchase Price: $10,000,000
• Closing Costs & Capex: $250,000
• Total Project Cost: $10,250,000
• NOI: $500,000
• Interest Rate: 5.0%
• Amortization: 30 Years
• LTV Constraint: 65%
• LTC Constraint: 60%
• DSCR Requirement: 1.25x
• Debt Yield Requirement: 8.0%

1. Debt Service Coverage Ratio (DSCR)

DSCR is the most important constraint to understand. It measures whether a property generates enough income to cover its debt payments with a required cushion. Most lenders require a minimum DSCR of 1.25x, meaning NOI must be at least 25% higher than annual debt payments. Because it ties directly to cash flow, DSCR is usually the binding constraint on stabilized assets.

To size a loan using DSCR, you work backward in two steps: first find the maximum debt payments the property can support, then convert that into a loan amount using the mortgage constant. The mortgage constant is the percentage of a loan's original balance paid annually to cover both principal and interest. It is a function of your interest rate and amortization period. At 5.0% and 30-year amortization, the constant is 0.06444, meaning a $1,000,000 loan requires $64,440 in annual debt service.

Step-by-Step Calculation

1. Calculate Max ADS
   NOI / DSCR Requirement = Max ADS
   $500,000 / 1.25 = $400,000
2. Calculate Mortgage Constant
   Use the PMT function in Excel to derive the constant from your rate and amortization.
   Formula: =PMT(Rate/12, AM*12, -1)*12
   Example: =PMT(5%/12, 30*12, -1)*12 = 0.06444
3. Calculate Max Loan
   Max ADS / Mortgage Constant = Max Loan
   $400,000 / 0.06444 = $6,209,000

The key point: you never start with a loan amount and check DSCR after. You work backward from the income the property generates to find the largest loan it can support.

2. Loan-to-Value (LTV)

LTV limits the loan based on the property's purchase price. A 65% LTV means the lender will not finance more than 65% of the property's value. LTV protects the lender by ensuring sufficient equity remains in the deal if property values decline.

3. Loan-to-Cost (LTC)

LTC is similar to LTV but is based on total project cost, including purchase price, closing costs, and capital expenditures. It is most relevant for value-add and construction-heavy deals.

4. Debt Yield

Debt yield measures the lender's return on the loan based purely on NOI, independent of interest rates or amortization. It answers a simple question: if the lender took the property back, what return would they be earning on the loan amount?

Why This Matters

In this example, LTC is the binding constraint at $6,150,000, which is lower than the maximum loan amounts for DSCR ($6,209,000), Debt Yield ($6,250,000), and LTV ($6,500,000).

Lenders calculate all four constraints on every deal and size to the most restrictive result. DSCR measures cash flow coverage, LTV caps leverage based on value, LTC limits leverage based on total project cost, and debt yield measures the lender's income return on the loan. Knowing which constraint will bind your deal lets you work backward from debt capacity to determine required equity, test your pricing assumptions, and avoid pursuing deals that will not finance.

Try the Calculator

The Max Loan Calculator runs all four constraints simultaneously. Enter your assumptions and instantly see the maximum loan amount along with how all four metrics look at that loan amount. No download required.

A free Excel template is also available for users who want to apply the same framework inside their own underwriting models. Fully unlocked, all formulas visible.

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