When a commercial lender looks at your deal, they are not reading your business plan first — they are running a short list of ratios. Those numbers decide two things: whether you get funded at all, and how big a loan the property will support. Everything else — the story, the location, the upside — sits on top of the math. If the ratios don’t clear, the story doesn’t get read.
The good news is that there are only four numbers that matter most, and none of them require finance-degree math. You can run every one of them on a napkin. Once you can, the whole conversation changes: you stop asking a lender "how much can I get?" and start telling them "here’s the loan this property supports, and here’s why." This guide walks the big four — LTV, DSCR, debt yield, and LTC — plus the cap-rate context and the sponsor-side factors that decide the pricing.
LTV and LTC — how big a loan the property supports
Loan-to-Value (LTV) is the loan divided by the property’s appraised value. Borrow $2,000,000 against a building that appraises at $3,000,000 and your LTV is 67%. It answers a simple lender question: if this deal goes sideways and we have to sell, how much cushion is there between our loan and the value? Most stabilized commercial loans top out around 65–75% LTV, depending on the asset — multifamily tends to stretch higher, special-use and hospitality lower.
Loan-to-Cost (LTC) is the same idea for a project you’re building or repositioning: the loan divided by total project cost — purchase plus hard costs plus soft costs plus contingency. A construction or heavy value-add lender leans on LTC because there is no stabilized value yet, only a budget. Typical ceilings run 65–80% LTC, which means you’re bringing the rest as equity. The two ratios cover different moments: LTV once the asset exists and appraises, LTC while you’re still turning money into a building.
DSCR — can the income carry the debt
Debt-Service Coverage Ratio (DSCR) is the one that most often kills or shrinks a loan. It’s the property’s Net Operating Income (NOI) divided by its annual debt service — the total of principal and interest you’d owe in a year. A DSCR of 1.00x means the income exactly covers the payment with nothing to spare, which no lender wants. They want a margin, so the standard bar is roughly 1.20x to 1.25x — meaning the property earns 20–25% more than the debt costs.
This ratio is why a property can appraise high and still only support a modest loan. If the NOI is thin, the coverage math caps the debt no matter what the value says. When people talk about a deal being "sized on cash flow, not value," this is the number doing the sizing.
Debt yield and cap rate — the lender’s downside check
Debt yield is NOI divided by the loan amount. Unlike DSCR, it ignores the interest rate and the amortization entirely — that’s the point. It answers a blunt question: if we foreclosed tomorrow and owned this property outright, what cash-on-cash return would our loan dollars earn? Because it strips out rate and term, a lender can’t "buy" a bigger loan by stretching the amortization or assuming a low rate. Many lenders hold a debt-yield floor around 9–10%, and on a tight deal that floor, not LTV or DSCR, is what caps the loan.
Cap rate is the market context around all of this: NOI divided by the property’s value or price. It’s not a loan ratio, but it’s how the value in your LTV gets set in the first place — a lower cap rate implies a higher value for the same income. When a lender or appraiser "caps the NOI" at, say, 6.5%, they’re converting income into value, which then feeds straight back into your LTV.
The sponsor side — the numbers that aren’t about the property
Even a clean property gets underwritten alongside the person behind it. Lenders look at your credit, your liquidity and reserves (cash left after closing to cover surprises), and your experience with the asset type. A first-time sponsor on a ground-up build is a different risk than a ten-deal operator, and the terms reflect it.
- Credit — a proxy for how you handle obligations; weak credit raises rate or requires a stronger guarantor.
- Liquidity / reserves — post-close cash, often expressed as months of debt service; thin reserves scare lenders more than most borrowers expect.
- Experience — a track record with this asset type lowers perceived risk and widens your options, especially on construction.
- Net worth — many lenders want a guarantor whose net worth is at least the loan amount.
One deal, run through all three ratios
Illustrative only — but watch how the same three inputs (value, NOI, and the proposed loan) feed every ratio. A stabilized property appraises at $4,000,000, throws off $280,000 in NOI, and you’re asking for a $2,800,000 loan at 7.0% on a 25-year amortization (annual debt service ≈ $237,500).
| Appraised value | $4,000,000 |
|---|---|
| Net Operating Income (NOI) | $280,000implied cap rate ≈ 7.0% |
| Proposed loan | $2,800,000at 7.0%, 25-yr amort |
| LTV | 70%$2.8M ÷ $4.0M — inside a typical 65–75% band |
| DSCR | ~1.18x$280K NOI ÷ ~$237.5K debt service — just under a 1.20x bar |
| Debt yield | 10.0%$280K NOI ÷ $2.8M loan — clears a ~9–10% floor |
The deal passes LTV (70%) and debt yield (10.0%), but DSCR comes in at ~1.18x — a hair under the usual 1.20x line. That single soft number is enough to shrink the loan: drop the ask to about $2,650,000 and the DSCR climbs back over 1.25x while LTV eases to 66%. The lesson is that a deal has to clear all of the ratios, not just the flattering ones — the tightest number sets your loan, and it’s rarely the one you were watching.
What each ratio is really doing
Every ratio has two readers. The lender uses it to bound their downside; you can use the same number to read the deal’s health before you ever apply.
What each ratio protects the LENDER from
- LTV — protects against a value drop; the cushion between the loan and a fire-sale price.
- DSCR — protects against a missed payment; proof the income covers the debt with margin.
- Debt yield — protects against cheap-rate illusions; a rate- and term-proof floor on the loan.
- LTC — protects against budget blowups; keeps real sponsor equity at risk in a project.
What each ratio tells YOU about the deal
- LTV — how much equity you’ll actually have to bring to close.
- DSCR — whether the rent genuinely carries the debt, or you’re feeding it every month.
- Debt yield — how thin your margin for error is if income or rates move against you.
- LTC — how much of your own cash is on the line before the lender’s dollar is at risk.
Common questions
- What LTV can I get on a commercial property?
- For a stabilized income property, most lenders top out around 65–75% loan-to-value, so plan to bring 25–35% of the value as equity. The exact ceiling depends on the asset — multifamily and strong retail tend to stretch higher, while special-use, hospitality, and riskier property types come in lower.
- What is a good DSCR for a commercial loan?
- Most lenders want a debt-service coverage ratio of at least 1.20x to 1.25x, meaning the property’s net operating income is 20–25% larger than its annual debt payment. Anything at or below 1.00x means the income barely covers or fails to cover the debt, and the loan will either shrink or not fund.
- What is debt yield and why do lenders use it?
- Debt yield is net operating income divided by the loan amount, expressed as a percentage — the cash-on-cash return the lender’s dollars would earn if they foreclosed and owned the property outright. Lenders use it because, unlike LTV and DSCR, it ignores the interest rate and amortization, so a borrower can’t manufacture a bigger loan by assuming a low rate or a long payback. Many hold a floor around 9–10%.
- Does the appraisal set my loan amount?
- The appraisal sets the value in your LTV, but it’s only one of several caps — not the final word. The loan is usually the smallest number that LTV, DSCR, and debt yield each allow, so a high appraisal won’t help if the income can’t clear the coverage or debt-yield tests. Value tells you the ceiling; cash flow often sets the actual number.
- Do lenders check me personally too, or just the property?
- Both. Even on a strong property, a commercial lender underwrites the sponsor — your credit, your liquidity and post-close reserves, your net worth, and your experience with the asset type. These factors rarely kill a well-covered deal on their own, but they move your rate, your required equity, and whether a personal guarantee is needed.
- Which ratio matters most?
- There is no single winner — the loan is capped by whichever ratio is tightest on your specific deal. On a low-cash-flow property, DSCR or debt yield usually binds; on a high-income property bought at a low value, LTV binds first. The practical move is to run all of them and watch for the one that comes in lowest, because that’s the number setting your loan.
- What is LTC and when does it apply instead of LTV?
- Loan-to-cost is the loan divided by total project cost — purchase plus construction and soft costs — and it applies to ground-up builds and heavy value-add deals where there’s no stabilized value to appraise yet. Lenders lean on LTC (typically capped around 65–80%) during construction, then switch to LTV once the finished property has real, documented income and can be valued.