Lenders size to a higher stress rate, haircut your income, and test the refinance — which is why the loan offered often lands below what today’s numbers suggest.
When a lender sizes a loan, they often don’t take today’s rate or in-place income at face value. They build in cushions — sizing to a higher “stress rate,” haircutting income, and testing what happens at refinance. Stress-testing is why the loan you’re offered can land below what current numbers seem to support.
Here are the main stress tests and how each one moves your proceeds.
Stress test 1: the underwriting (stress) rate
The most common one. Rather than sizing DSCR on the actual note rate, many lenders use a stress rate set above market — sometimes today’s rate plus a fixed spread, sometimes a floor (for example, “the greater of the note rate plus 1% or 7.5%”).
A higher sizing rate means a higher assumed debt service, which lowers the loan that passes the DSCR test:
Because the mortgage constant rises with the rate, sizing at 8% instead of 7% produces a smaller DSCR-supported loan even though your actual payment is based on 7%. The Loan Sizing Calculator lets you enter a stress rate to see the effect.
Stress test 2: the refinance / exit test
For loans with a balloon, lenders care whether the property can refinance at maturity. They test a refinance constant or exit DSCR at an assumed future rate, confirming projected income would still support a take-out loan large enough to repay the balance. A deal that only works at today’s low rate may fail the exit test and get sized down.
Stress test 3: income haircuts
Lenders rarely take a rent roll at face value. Common adjustments:
- Vacancy floor. Even a fully leased building is underwritten with a market vacancy assumption, often 5%–10%.
- Mark-to-market rents. Above-market in-place rents may be trimmed to market for sizing.
- Tenant credit and rollover. Income from weak-credit or near-term-expiring tenants may be discounted or excluded.
- Reserves and capital items. Management fees, replacement reserves, and TI/LC allowances come out to reach the NOI used for sizing — often lower than an owner’s pro forma NOI.
The result is an underwritten NOI that can sit meaningfully below the number an owner would quote, and it flows straight through DSCR and debt yield.
Stress test 4: cap rate / value sensitivity
On the value side, an appraiser and lender may apply a cap rate above recent comps to stay conservative, lowering the value used for the LTV test. A higher cap rate means a lower value, which can pull the LTV-supported loan down.
Why this matters for borrowers
Stress-testing is the gap between “what my numbers say I should get” and “what the term sheet says.” Understanding it lets you:
- Underwrite to the lender’s NOI, not your pro forma. Apply a realistic vacancy factor and reserves before you estimate proceeds.
- Ask about the stress rate up front. Two lenders quoting the same note rate can size very differently if one uses a 7.5% floor and the other sizes to the actual rate.
- Plan for the exit. If your deal only pencils at today’s rate, expect a smaller loan or a structure that addresses refinance risk.
How Mercury helps
We underwrite your deal the way a lender will — applying realistic income adjustments and stress rates — so the proceeds estimate you walk in with is the one you can actually close. Then we run a competitive process to find the lender whose stress assumptions fit your asset best, where we’re licensed or exempt. Model a stress rate in the Loan Sizing Calculator, then discuss your financing scenario.
Frequently asked questions
What is a stress rate in CRE lending?
A rate above the actual note rate that a lender uses to size the loan, protecting against future rate increases. It produces a smaller loan than sizing at today’s rate.
Why is my underwritten NOI lower than my actual NOI?
Lenders apply vacancy floors, mark rents to market, deduct reserves and management fees, and may discount weak or expiring tenant income. The sizing NOI is typically more conservative than an owner’s pro forma.
What is an exit or refinance test?
A check that the property could refinance at maturity at an assumed future rate and still support a loan large enough to repay the balloon. Deals that only work at today’s rate may be sized down.