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Underwriting•8 min read

DSCR vs Debt Yield vs LTV: The Underwriting Triangle

Lenders use three core metrics to evaluate commercial real estate loans. Each measures risk from a different angle. Here's how they work together.

Educational content only: This information does not constitute legal, tax, financial, or investment advice. Always consult qualified professionals before making investment decisions.

The Problem: One Metric Isn't Enough

Most investors focus on DSCR (debt service coverage ratio) when underwriting loans. That's a mistake.

DSCR tells you if the property generates enough cash flow to cover debt payments. But it says nothing about asset-level returns or collateral protection.

That's why lenders use three metrics together: DSCR, debt yield, and LTV. Each answers a different question.

The Three Questions

  • DSCR: Can the property pay the debt?
  • Debt Yield: What return does the lender get on their loan?
  • LTV: How much equity cushion protects the lender?

Metric 1: DSCR (Debt Service Coverage Ratio)

DSCR = NOI / Annual Debt Service

Example: $400k NOI / $320k debt service = 1.25x DSCR

What it measures: Cash flow coverage. Can the property generate enough income to pay the mortgage?

Lender minimums: Typically 1.20x to 1.35x depending on asset class and sponsorship.

Why it's not enough alone: DSCR doesn't care about valuation. A property bought at a 3% cap rate with low leverage can have a strong DSCR but terrible economics.

Example: You buy a building for $20M with $500k NOI (2.5% cap). You put 50% down and get a low-rate loan. Your DSCR looks great, but your asset-level returns are terrible because you overpaid.

Metric 2: Debt Yield

Debt Yield = NOI / Loan Amount

Example: $400k NOI / $4M loan = 10% debt yield

What it measures: Asset-level return to the lender. If the lender forecloses and owns the property, what unlevered return do they earn?

Lender minimums: Typically 9% to 12% depending on asset quality and market.

Why lenders love it: Debt yield is valuation-agnostic. Unlike LTV, it doesn't rely on appraisals. It's a pure measure of NOI relative to loan size.

Key insight: Debt yield protects lenders from appraisal inflation. Even if you overpay and the appraisal supports it, a low debt yield signals weak economics.

Metric 3: LTV (Loan-to-Value)

LTV = Loan Amount / Property Value

Example: $4M loan / $5.5M value = 72.7% LTV

What it measures: Collateral protection. How much equity cushion exists before the lender takes a loss?

Lender maximums: Typically 65% to 80% depending on asset class, sponsorship, and market.

Limitation: LTV relies on appraised value, which can be inflated or outdated. That's why lenders also require debt yield.

How They Work Together

Lenders look at all three metrics simultaneously. A deal can pass one or two but fail on the third:

Scenario 1: Strong DSCR, Weak Debt Yield

$500k NOI, $10M value, 50% LTV = $5M loan
DSCR: 1.40x (strong)
Debt Yield: 10% (marginal)
Problem: High equity requirement limits proceeds. Borrower may need to look elsewhere for higher leverage.

Scenario 2: Strong LTV and DSCR, Weak Debt Yield

$300k NOI, $6M value, 75% LTV = $4.5M loan
DSCR: 1.25x (acceptable)
Debt Yield: 6.7% (too low)
Problem: Lender won't approve. Borrower overpaid or NOI is too low for the loan size.

Scenario 3: Balanced (Passes All Three)

$400k NOI, $5.5M value, 70% LTV = $3.85M loan
DSCR: 1.30x ✓
Debt Yield: 10.4% ✓
LTV: 70% ✓
Result: Loan approved.

Practical Takeaways

  • →Don't underwrite to just one metric. Run all three before calling a lender.
  • →If your debt yield is under 9%, you either overpaid, NOI is too low, or you're asking for too much debt.
  • →DSCR can mask overvaluation. Debt yield catches it.
  • →Use our investment calculator to model all three metrics simultaneously.

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