Debt Yield vs LTV: Income Cushion vs Collateral Leverage

Side by side

A higher appraisal reduces LTV with the same loan balance. It does not raise debt yield unless income or debt also changes. Neither calculation uses interest rate directly.

When the income limit is lower

Assume $1 million of income, $20 million of value and a $15 million request. LTV is 75% and debt yield is 6.67%.

Against hypothetical limits of 75% LTV and 9% minimum DY, the request meets the LTV cap but misses DY. The respective limits are $15 million and $11,111,111. These are teaching assumptions, not lender-category requirements.

When LTV is lower

Assume $1.5 million of income, $16 million of value, a 10% DY target and 70% maximum LTV. The DY-only limit is $15 million; the LTV-only limit is $11.2 million. Among these two tests, LTV binds.

In either example, a lower DSCR limit or another requirement could reduce the modeled proceeds. Use the full sizing calculator rather than treating a two-test comparison as approval.

Relate the ratios through cap rate

On the same income, value and balance basis:

Debt yield = cap rate / LTV

Use decimals. A 4% cap rate at 60% LTV gives 6.67% debt yield. Whether it meets a requirement depends on the quoted target, not the property label. See debt yield versus cap rate.

Stress income and value separately

If value falls while income and balance remain fixed, LTV rises and debt yield stays unchanged. If income falls while value and balance are fixed, debt yield falls and LTV stays unchanged. In an actual scenario both can change, so show the assumptions separately.

Use the LTV calculator, debt-yield calculator and NOI worksheet. For additional debt layers, specify whether the numerator in the collateral test is the senior balance or combined debt using the LTV versus CLTV guide.

Frequently asked questions

Can a 60% LTV loan fail debt yield? Yes, if its income-to-loan ratio is below the applicable target. Low LTV alone does not establish income adequacy.

Will a falling valuation always make LTV bind? No. It lowers the LTV loan limit, but DY or DSCR can remain lower. Recalculate rather than assuming a ranking.