CRE Loan Sizing Example: Step-by-Step Walkthrough
Walk through a commercial mortgage loan sizing example using DSCR, LTV, and debt yield to find the binding constraint.
Calculate separate loan limits under debt yield, DSCR and LTV, then take the lowest modeled amount. In this hypothetical $20 million acquisition, DSCR limits the loan to $11,602,127. Additional underwriting requirements may reduce actual proceeds.
Download the editable loan-sizing workbook and NOI worksheet. The workbook uses the same assumptions and formulas shown below. Blue cells with amber backgrounds are editable.
Reconcile annual income first
| Income bridge | Annual amount |
|---|---|
| Gross potential rent | $1,800,000 |
| Less vacancy and credit loss | ($90,000) |
| Other operating income | $40,000 |
| Effective gross income | $1,750,000 |
| Operating expenses | ($625,000) |
| Operating NOI before reserves | $1,125,000 |
| Reserve deduction | ($25,000) |
| Income used in both sizing tests | $1,100,000 |
These are invented teaching inputs, not an actual transaction or a lender's required allowances. The example uses post-reserve income for both DY and DSCR. Confirm the applicable lender's definitions; operating NOI and post-reserve cash flow are distinct figures.
Set the financing assumptions
| Assumption | Value |
|---|---|
| Property value / purchase price | $20,000,000 |
| Requested loan | $15,000,000 |
| Maximum LTV | 75% |
| Minimum debt yield | 9% |
| Minimum DSCR | 1.25x |
| Nominal annual interest rate | 6.5% |
| Amortization | 30 years |
| Payment frequency | Monthly |
The LTV, debt-yield and DSCR limits are illustrative assumptions. They do not identify an agency program or promise eligibility.
Calculate each loan limit
LTV: $20,000,000 × 75% = $15,000,000.
Debt yield: $1,100,000 ÷ 0.09 = $12,222,222, rounded to the nearest dollar.
DSCR: First divide $1,100,000 by 1.25 to obtain $880,000 of maximum annual debt service. At a monthly rate of 0.065 ÷ 12 over 360 payments, the annual loan constant is approximately 7.584816%. Divide $880,000 by the unrounded constant to obtain $11,602,127.
The lowest modeled limit is therefore $11,602,127, constrained by DSCR. Equity toward the $20 million price is approximately $8,397,873, before closing costs, escrows, reserves and other funding needs.
Why the $15 million request exceeds the modeled limit
| Requested-loan metric | Result |
|---|---|
| LTV | 75.00% |
| Debt yield | 7.33% |
| Annual debt service | $1,137,722 |
| DSCR | 0.97x |
The request meets the assumed LTV cap but falls below both income-test assumptions. Looking only at LTV misses the income shortfall.
Test the sensitivity
In the workbook, add $100,000 to the operating-expense adjustment. Income after reserves falls to $1 million and the DSCR loan limit falls proportionately. Change the LTV cap to 50% with original income restored and the $10 million LTV limit becomes the binding test.
The workbook's interest-only switch is a payment assumption. Some programs require amortizing payments in underwriting even when contractual payments are interest-only; confirm the rule before using the switch.
The institutional sizing sensitivity matrix: when does debt yield bind?
In multi-constraint commercial loan underwriting, the exact inflection point where Debt Yield replaces DSCR or LTV as the binding constraint is governed by a fundamental algebraic identity:
Inflection Identity:
Debt Yield Binds over DSCR: Loan Constant (K) < Minimum Debt Yield / Minimum DSCR
Debt Yield Binds over LTV: Market Cap Rate < Minimum Debt Yield x Maximum LTV
The sensitivity matrix below plots market capitalization rates against annual debt constants, illustrating which constraint controls borrowing proceeds on an institutional $20,000,000 asset with a 75% LTV ceiling, 1.25x DSCR floor, and 9.00% Debt Yield target:
| Loan Constant ($K$) | 5.00% Cap Rate | 5.50% Cap Rate | 6.00% Cap Rate | 6.50% Cap Rate | 7.00% Cap Rate |
|---|---|---|---|---|---|
| 6.50% (Low Rate / 30-Yr) | Debt Yield Binds | Debt Yield Binds | Debt Yield Binds | Debt Yield Binds | LTV Binds |
| 7.20% (Inflection Hurdle) | Debt Yield Binds | Debt Yield Binds | Debt Yield Binds | Debt Yield Binds | LTV Binds |
| 7.80% (6.25% / 25-Yr) | Debt Yield Binds | Debt Yield Binds | DSCR Binds | DSCR Binds | DSCR Binds |
| 8.50% (7.25% / 25-Yr) | Debt Yield Binds | DSCR Binds | DSCR Binds | DSCR Binds | DSCR Binds |
| 9.25% (8.00% / 20-Yr) | DSCR Binds | DSCR Binds | DSCR Binds | DSCR Binds | DSCR Binds |
Interactive CRE loan sizing sandbox
Run all three simultaneous sizing tests across your specific deal metrics:
Apply the method to your own inputs
Use the CRE loan sizing calculator for an online check, the income reconciliation guide to document adjustments, and the underwriting checklist to record sources and loan terms. Calculations retain full precision internally; displayed dollars are rounded.
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