The three tests lenders use
Loan-to-value. The loan can’t exceed a percentage of the appraised value (or purchase price, if lower). Typical caps are 65–80%.
Debt service coverage. Net operating income divided by annual debt service must be at least the lender’s minimum, usually 1.20x–1.35x. This sets a maximum payment, and the rate and amortization turn that payment into a maximum loan.
Debt yield. Some lenders, mostly CMBS and larger banks, also require NOI to be at least 8–10% of the loan amount. Unlike DSCR, it doesn’t depend on the interest rate.
The loan you can get is the lowest of the three.
Worked example
A $3,000,000 property with $210,000 of NOI, priced at 7.25% on a 25-year amortization with a 75% LTV cap and 1.25x DSCR minimum:
- LTV limit: $2,250,000
- DSCR limit: $1,936,894
- Maximum loan: $1,936,894 (64.6% LTV), limited by income
Even though the value would support $2,250,000, the income only supports $1,936,894. This is common when cap rates are below interest rates.
How to qualify for a larger loan
- Longer amortization or interest-only. Lowers the payment and raises the DSCR limit.
- A different lender. DSCR minimums and LTV caps vary widely. Private and bridge lenders often lend on in-place income at lower coverage.
- Higher underwritten NOI. Signed leases, recent rent increases and lower documented expenses all count.
- A bridge loan now, permanent loan later. Useful when income is rising but not yet stabilized.