Underwriting
DSCR or debt yield: which constraint limits your loan?
A lender sizes a loan against several tests at once and lends the smallest result. Coverage binds when rates are high, debt yield binds when a lender wants a floor on income per dollar, and loan-to-value binds when value is the concern.
By Neeli Khanna, designated officer and broker. Published . 3 minute read.
Key takeaways
- The binding constraint is whichever test produces the smallest loan; relaxing any other test does not raise proceeds.
- DSCR depends on the rate and amortization, so it tightens when rates rise. Debt yield ignores both.
- Hotel CMBS lenders in Corin's assumptions require 11.0% to 12.5% debt yield by hotel type, which often binds before coverage.
- Run all three tests before deciding how to improve a deal.
Three tests, one loan
Every sizing starts from three numbers: net operating income, the property's value or cost, and the loan's rate and amortization. From those a lender derives several maximum loans and lends the smallest.
Debt service coverage ratio (DSCR) divides income by the annual payment. Debt yield divides income by the loan balance. Loan-to-value (LTV) divides the loan by value. Each one answers a different worry: can the property pay, how much income stands behind each dollar, and how much cushion is there if values fall.
A worked example
Take a property with $1,000,000 of net operating income. At 6.00% over 30 years, a loan of $10,000,000 has a coverage ratio of 1.39x. With a required coverage of 1.25x, the largest loan the income supports is about $11,120,000. A lender with a 10% debt yield floor would cap the loan at $10,000,000 instead, because $1,000,000 divided by 10% is $10,000,000.
In this example the debt yield test is the tighter one, so negotiating a lower rate would not raise the loan. Only more income, a lender with a lower floor, or a different program would. At a higher rate the coverage test would tighten and could become the binding one.
When each one binds
As a rule of thumb, from how Corin's sizer behaves across programs:
- Coverage binds on long-term fixed-rate programs with a high minimum, such as HUD 232 at 1.45x, especially when rates are high.
- Debt yield binds on conduit and bridge loans, where lenders want a floor on income that does not move with rates. A boutique hotel at 12.5% is an example.
- Loan-to-value binds when income is strong relative to value, for example a low cap rate market or a recently renovated property. Agency loans in Corin's assumptions go to 80%, but real deals often land lower because coverage binds first.
Hotel example
A 120-key hotel earning $1,800,000 of net operating income looking for a $15,000,000 loan has a debt yield of 12.0%. For a boutique or independent hotel the floor in Corin's CMBS assumptions is 12.5%, so the largest loan on debt yield alone is about $14,400,000. A premium-flag hotel with the same income clears a lower floor.
What to do about it
Find the binding constraint first. If coverage binds, a longer amortization, an interest-only period tested on the amortizing payment, or a lower-rate program raises the loan. If debt yield binds, only income or a lender with a lower floor helps. If loan-to-value binds, more value, through renovation or a better appraisal, or more equity, is the lever.
Frequently asked questions
Which is more important, DSCR or debt yield?
Neither always. The one that gives the smaller loan is the binding constraint. DSCR depends on the rate and amortization, so it moves with the market; debt yield does not.
Why do lenders use debt yield at all?
It compares income to the loan alone, so it is not affected by the interest rate, amortization or cap rate. That makes it a steadier measure of risk, especially for loans that will be refinanced.
Can I improve DSCR without more income?
Yes. A lower rate, a longer amortization or a smaller loan raises coverage. Lenders re-underwrite income, so they may adjust it first.
Keep going
Sources
- Corin underwriting assumptions, reviewed 2026-10-31
- Corin loan sizer (lib/sizing)
This article is general information, not legal, tax or investment advice. Program rules change by notice; confirm current terms with a lender.
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