Borrowers tend to ask one question about a commercial or apartment loan: what loan-to-value can I get? Lenders ask three. A loan has to satisfy a value test, a cash flow test and, with many lenders, a debt yield test, and the smallest answer is the loan. Which test is the tight one decides what you should do about it, so it is worth knowing before you apply.
The three tests, and what each one protects against
| Measure | Formula | What moves it | What the lender is asking |
|---|---|---|---|
| Loan-to-value (driven by cap rate) | Loan ÷ (NOI ÷ cap rate) | NOI and the market cap rate | If we had to sell the property, would the price cover the loan? |
| Debt service coverage ratio (DSCR) | NOI ÷ annual loan payments | NOI, interest rate and amortization | Does the income pay the loan with room to spare? |
| Debt yield | NOI ÷ loan amount | NOI only | What return would we earn on our loan if we owned the property? |
All three start from the same net operating income, which is why the income figure matters so much. See how lenders calculate NOI for the adjustments to expect.
Each test has a blind spot. Loan-to-value depends on an appraiser's cap rate, which can be generous in a hot market. DSCR depends on the interest rate, so a low rate can make a large loan look comfortable. Debt yield ignores both the cap rate and the interest rate, which is exactly why lenders like it as a cross-check.
One property, three answers
Illustrative example. Not an offer or a completed transaction.
A stabilized apartment building has underwritten NOI of $200,000. The appraiser applies a 6.0% market cap rate, so value is $200,000 ÷ 0.060 = $3,333,333.
Assume a lender that limits loan-to-value to 70%, requires a DSCR of at least 1.25 and wants a debt yield of at least 9%. Assume the loan carries a 7.0% interest rate on a 30-year amortization. Yearly principal and interest on that loan are about 7.98 cents for each dollar borrowed, a figure lenders call the loan constant.
- Value test: 70% of $3,333,333 = $2,333,333.
- Coverage test: $200,000 ÷ 1.25 = $160,000 of allowable annual payments. $160,000 ÷ 0.0798 = about $2,004,000.
- Debt yield test: $200,000 ÷ 0.09 = $2,222,222.
The loan is the smallest of the three: about $2,004,000, set by coverage. That is 60% of value, not the 70% the borrower was expecting, and nothing about the appraisal caused it.
Now move the cap rate. If the appraiser uses 7.25% instead, value falls to $2,758,621 and the value test drops to $1,931,034. The coverage and debt yield results do not change, because neither uses value. The loan is now about $1,931,000 and the value test has become the tight one.
The interest rates, amortization, loan-to-value, coverage and debt yield figures used here are assumptions chosen to show the math. They are not quoted rates or program terms. Actual rates and limits vary by lender, property, borrower and program and change with the market.
Same income, two ways to underwrite coverage
Not every lender runs the coverage test the same way. The two most common approaches on income property produce very different loan amounts from the same NOI, and Blue Fox Capital Corporation arranges both.
- Amortizing loan at a 1.25 DSCR. The payment includes principal and interest, and the lender wants income to exceed that payment by 25%.
- Interest-only loan at a 1.0 DSCR. The payment is interest only, usually at a higher rate, and the lender only requires income to equal the payment.
Illustrative example. Not an offer or a completed transaction.
Take the same building: $200,000 of underwritten NOI and a $3,333,333 value at a 6.0% cap rate. Compare a 7.0% rate on a 30-year amortization underwritten to a 1.25 DSCR with an 8.5% interest-only rate underwritten to a 1.0 DSCR.
| Amortizing, 1.25 DSCR | Interest-only, 1.0 DSCR | |
|---|---|---|
| Assumed interest rate | 7.0% | 8.5% |
| Payment basis | Principal and interest, 30-year amortization | Interest only |
| Annual payment per dollar borrowed | About 7.98 cents | 8.5 cents |
| NOI the lender lets you spend on payments | $200,000 ÷ 1.25 = $160,000 | $200,000 ÷ 1.0 = $200,000 |
| Coverage-sized loan | $160,000 ÷ 0.0798 = about $2,004,000 | $200,000 ÷ 0.085 = about $2,353,000 |
| Loan as a share of value | 60.1% | 70.6% |
| Debt yield | 10.0% | 8.5% |
| Cash flow after payments at that loan size | $40,000 per year | $0 |
| Loan balance over time | Pays down each month | Does not pay down |
The interest-only structure sizes about $349,000 larger, roughly 17% more loan from the same income, even though its rate is a point and a half higher.
The interest rates, amortization, loan-to-value, coverage and debt yield figures used here are assumptions chosen to show the math. They are not quoted rates or program terms. Actual rates and limits vary by lender, property, borrower and program and change with the market.
Where the extra proceeds come from. It is not the payment. The interest-only payment per dollar is actually higher: 8.5 cents against about 7.98. The entire difference comes from the coverage requirement. At 1.25, one fifth of NOI is held back as a cushion. At 1.0, every dollar of NOI is counted toward the payment. Run the interest-only loan at a 1.25 DSCR and it would size to about $1,882,000, less than the amortizing loan.
What happens next. At 70.6% of value, the interest-only loan has run into the value test. A lender limited to 70% would hold it to $2,333,333. The tight test has moved from coverage to value, which is why the cap rate the appraiser uses matters more on interest-only loans.
What each structure costs you.
| Amortizing, 1.25 DSCR | Interest-only, 1.0 DSCR | |
|---|---|---|
| Proceeds | Lower | Higher |
| Rate | Typically lower | Typically higher |
| Cushion if a unit goes vacant or a bill rises | Built in | None at full proceeds; the owner covers any shortfall |
| Equity built through payments | Yes | No; the full balance is due at maturity |
| Usually fits | Stabilized buildings held for the long term, owners who want cash flow | A loan coming due that will not fit on amortizing terms, income that is about to rise, a planned sale or refinance |
Neither is the better loan in general. The amortizing loan is cheaper and safer and puts less cash in your hands at closing. The interest-only loan solves a proceeds problem today in exchange for a higher rate and no margin. We arrange both, and the first step is running your NOI through each so you can see the trade before you choose. Availability depends on the property, the borrower and lender approval.
Why the tight test matters
The fix depends on which limit you are hitting.
- If value is the limit, the levers are a higher NOI, better comparable sales for the appraiser, or a lower loan amount. A lower interest rate does not help.
- If coverage is the limit, the levers are a higher NOI, a lower payment, a program that underwrites interest-only or to a lower coverage requirement, or a lower loan amount. A higher appraisal does not help.
- If debt yield is the limit, the only levers are a higher NOI or a lower loan amount. Neither the appraisal nor the rate helps.
Raising NOI is the one lever that improves all three, which is why owners with a loan maturing in the next year should look at rents, vacancies and expenses before they look at lenders.
When each test tends to be the tight one
- Low cap rate, higher interest rate markets. Coverage and debt yield usually bind before value. Buildings in coastal California often qualify for far less than the headline loan-to-value for this reason. See California apartment cap rates in 2026.
- Higher cap rate properties. Income is large relative to price, so coverage is easier and the value test tends to bind.
- Refinances of loans made when cap rates were lower. Value has fallen while the balance has not, so the value test often binds first and coverage second. We work through that case in how rising cap rates shrink a refinance.
How this differs on small rental properties
On one-to-four unit rentals, a DSCR investor loan uses a simpler version of the coverage test: monthly rent divided by the monthly payment including taxes, insurance and association dues, rather than NOI divided by debt service. Value comes from comparable sales, not a cap rate, and debt yield is not part of the conversation. If that is your property type, start with DSCR investor loans or California DSCR rental loans.
Run it yourself in five steps
- Rebuild NOI the way a lender will, with vacancy, management and reserves.
- Divide NOI by a realistic market cap rate and by one a half point higher. Those are your value range.
- Divide NOI by the coverage a lender is likely to require, then divide by the annual loan constant. That is your coverage-limited loan. Run it both ways: amortizing at 1.25 and interest-only at 1.0.
- Divide NOI by a debt yield threshold. That is your debt-yield-limited loan.
- Take the smallest figure and compare it with the loan you need.
If the smallest figure is below your current balance, the property may need a different structure for a period, such as a commercial bridge loan, while the income catches up. The background on value is in our cap rate guide.
Frequently asked questions
What is the difference between cap rate and debt yield?
Cap rate is NOI divided by the property's value. Debt yield is NOI divided by the loan amount. Cap rate describes the property's pricing; debt yield describes how much income supports each dollar of the lender's loan.
Which matters more to a lender, LTV or DSCR?
Both must be met, and the loan is sized to whichever produces the smaller amount. In markets where interest rates are above cap rates, coverage often limits the loan before loan-to-value does.
Why do lenders use debt yield?
Debt yield does not depend on the interest rate, the amortization schedule or the appraised value, so it cannot be improved by a low rate or an optimistic appraisal. It gives the lender a consistent measure of risk across loans.
Is the DSCR on a rental house the same as on an apartment building?
The idea is the same but the math differs. On one-to-four unit rentals, lenders usually compare rent with the monthly payment including taxes, insurance and dues. On commercial and 5+ unit property, they compare NOI with annual debt service.
Does an interest-only loan qualify for a larger loan amount?
Often, yes. When a lender underwrites interest-only payments to a 1.0 DSCR, all of the NOI counts toward the payment, so the same income supports a larger loan than an amortizing loan underwritten to 1.25, even at a higher rate. The trade-offs are a higher rate, no cushion and no principal paydown.
What can I do if coverage limits my loan?
Coverage improves with higher NOI or a lower annual payment, or with a program that underwrites to a lower coverage requirement. Depending on the program, that may mean a different rate structure, interest-only payments or a smaller loan. A higher appraised value does not change coverage.
Find out which test is setting your loan amount
Send the rent roll, operating statement and the loan amount you need, and we will review which financing options may fit. Term sheets are subject to review and lender approval and are not a commitment to lend.
Blue Fox Capital Corporation arranges and places financing for real estate investors, commercial property owners and California homeowners. Blue Fox Capital Corporation is a licensed California mortgage broker (DRE 01527288, NMLS 1840487). On select correspondent loan programs it is the direct lender named on the loan documents. We confirm the role for your loan before anything is submitted. Daniel Eckhouse, NMLS 217328 | CA DRE 01977403. This article is general information, not an offer, a rate quote, a loan approval, an appraisal or legal, tax or investment advice for your situation. Examples are illustrative only and are not completed transactions. Market figures are from the sources and dates cited and may have changed. Programs, terms and availability vary by property, borrower and lender and are subject to qualification and lender approval. Not all applicants will qualify. The business-purpose loans discussed are not available for a home you live in or plan to live in. Equal Housing Opportunity. 4695 MacArthur Court, 11th Floor, Newport Beach, CA 92660 | (310) 756-3619 | dan@bluefoxcapital.com