Debt Yield vs DSCR: Understanding Two Critical Lender Metrics

For decades, the Debt Service Coverage Ratio (DSCR) was the undisputed king of commercial loan underwriting. But after the 2008 financial crisis, when fluctuating interest rates and property values made DSCR seem less reliable, a new metric rose to prominence: Debt Yield. Today, most sophisticated lenders, especially in the CMBS (conduit) market, use both to assess risk. Understanding the difference between debt yield vs DSCR, and why lenders care about both, is crucial for any borrower seeking financing in today's market.

What is DSCR? A Measure of Cash Flow Cushion

As a quick refresher, DSCR measures a property's ability to cover its debt payments out of its net income. It tells a lender how much cash flow cushion exists. For a complete guide to calculating DSCR, see our DSCR calculator guide.

A DSCR of 1.25x means the property generates 25% more income than needed for its mortgage. While effective, DSCR has a flaw: it can be manipulated by loan terms. A very low interest rate or a long 30-year amortization can produce a great DSCR, even if the loan amount is very high relative to the property's income, masking the underlying risk.

What is Debt Yield? A Measure of Lender's Return

Debt Yield was designed to solve this problem. It measures the property's NOI relative to the total loan amount, ignoring the interest rate and amortization. It essentially calculates the lender's "return on investment" if they had to foreclose on the property on day one.

A 10% debt yield means that if the lender took back the property, their cash-on-cash return on the loan amount would be 10%. Because it's not affected by loan terms, lenders see it as a purer, more stable measure of a deal's fundamental risk. Most lenders have a minimum debt yield requirement, often around 9-10%.

Key Differences: Debt Yield vs. DSCR

Let's compare the two metrics directly to highlight their core differences.

How You Can Pass DSCR but Fail Debt Yield

It's common for a deal to meet the DSCR requirement but fail the debt yield test. This happens when low interest rates or long amortization periods allow a borrower to qualify for a large loan that the property's income can't truly support from a risk perspective.

Example Scenario:

• Property NOI: $90,000
• Loan Amount: $1,000,000
• Loan Terms: 4.5% interest, 30-year amortization
• Annual Debt Service: $60,800

Let's calculate both metrics:

DSCR Calculation:

$90,000 (NOI) / $60,800 (Debt Service) = 1.48x

The 1.48x DSCR is excellent, well above the 1.25x minimum. Most borrowers would think this loan is a slam dunk.

Debt Yield Calculation:

$90,000 (NOI) / $1,000,000 (Loan Amount) = 9.0%

The 9.0% debt yield just barely meets the minimum requirement for many lenders, and might be too low for others. The lender sees that while the monthly payments are manageable, the total loan is very large compared to the property's income-generating power. They might reduce the loan amount to $900,000 to achieve a 10% debt yield, forcing the borrower to come up with a larger down payment.

Which Metric Matters More?

Today, both matter. Lenders use these metrics as independent constraints. Your loan will be sized to the *lower* of the amounts determined by the LTV, DSCR, and Debt Yield tests. You must pass all three hurdles.

As a sophisticated borrower, you should analyze both. Use our DSCR calculator and Debt Yield calculator to stress-test your deal from a lender's perspective before you even submit your application.