Two weeks before closing, our lender came back and told us the loan was smaller.
We had a term sheet signed at 75% LTV. Agency debt, 30-year amortization, fully underwritten and approved. Nothing at the property had changed. No occupancy slip, no collections problem, no surprise on the rent roll.
What changed was the index. In the 30 days after we went under contract, rates moved roughly 0.7%. The agency dropped its LTV guidance in response. Our lender followed it down to 70%.
So instead of coordinating a closing, we were back in negotiation with the seller and back in negotiation with the lender, with 14 days on the clock. It’ll get done. The seller has debt maturing and no realistic ability to wait us out, and that’s the only reason the timing is workable rather than fatal.
The lesson isn’t about that deal. It’s about how many multifamily buyers are right now underwriting off numbers that stopped being true months ago.
Why the lender pulls your LTV instead of your rate
Most buyers think of the loan quote as a single number. It isn’t. Your lender is watching two things, and LTV is what they adjust when those two things move against them.
The first is debt service coverage ratio. The second is debt yield. Both are constraints, and your loan gets sized to whichever one binds first.
Here’s the sequence. The index rises. The spread over that index usually holds, because the spread reflects the lender’s view of your deal, not the market’s view of money. So your all-in rate goes up. Higher rate means higher annual debt service on the same loan amount. Same NOI divided by higher debt service means lower DSCR. If the lender underwrites to a 1.25 and you’ve fallen below it, they have exactly one lever that doesn’t require your NOI to change.
They shrink the loan.
The same math runs on debt yield. NOI divided by loan amount has to clear their threshold, so a lender getting nervous raises the threshold and the loan comes down to meet it.
None of this requires anything to go wrong at your property. It’s arithmetic on numbers you don’t control.
Why you find out so late
Final loan sizing happens at the end of the process, not the beginning.
A term sheet is a snapshot of conditions on the day it was written. Between signature and closing, the lender re-runs the numbers against the current index and current internal guidance. If the agency they sell to has revised its guidance in the interim, that revision flows straight through.
So the notification arrives in the last stretch, after your due diligence money is spent, after you’ve told your investors what you need, and after you’ve built a closing timeline around a loan amount that no longer exists.
That’s the gut punch. Not the size of the gap, the timing of it.
The four numbers to refresh this week
The fix is unglamorous. You go get current data and put it in your model.
Call every lender you would realistically use on your next deal. Banks, credit unions, agency contacts, whoever your broker recommends. For each one, write down four things:
Maximum LTV they’re doing today. Not their published guideline. What their committee actually approved last month.
Current spread over the index. For context, a stabilized deal has historically priced somewhere around 1.5 to 2.25 points over. Anything at 3 points or wider used to signal a distressed asset. If you’re being quoted a 3-point spread on a clean property, that’s a signal about the lender, not the deal.
The DSCR they’re underwriting to. A shift from 1.20 to 1.30 changes your maximum loan meaningfully, and lenders move this quietly.
The debt yield they’re pricing to. Ask whether they size on DSCR, debt yield, or both. Plenty of buyers have never asked and don’t know which constraint is actually capping their proceeds.
Then ask the question that matters most: are you holding your terms right now, or are you backing off proceeds?
They’ll answer. Your brokers will too, because a deal that collapses at the lender makes them look bad in front of their seller. Do this once a month while the market is moving. Every other month is not often enough anymore.
One question to ask the loan officer
If a quote comes back well outside the range, ask the loan officer how many multifamily loans they personally close in a year.
Loan officers are salespeople. The job is to get applications submitted. An officer who doesn’t do much multifamily, or an institution with no current appetite for it, will still take your application and will still quote you. The terms are how you find out. A wide spread, a short amortization, and a large down payment requirement usually means the lender doesn’t really want the asset class right now.
If that’s what you’re hearing, find a different officer or a different institution. Ask your broker who they’d recommend. They almost always have someone, and they have a reason to send you to a lender who actually closes.
If they push you from 75 to 70, run 65
This is the part worth acting on rather than just absorbing.
Getting cut from 75% to 70% gives you a smaller loan and nothing in return. You’re paying the same spread on less money.
At 65%, the agencies move you into a different pricing tier, and a different set of terms becomes available. Full-term interest only. Tighter spreads. Better structure. Sometimes the smaller loan is the better loan once you account for what comes with it.
So before you accept 70, model 65 and compare the whole package. If the deal still clears your returns down there, you may be trading a little proceeds for materially better debt.
The broader argument for lower LTV
We usually land between 60 and 65% on our deals. That costs us roughly a point and a half to two points of IRR against running at 75 or 80.
We pay it on purpose. At 65%, a lender re-trade two weeks before closing is an inconvenience and a renegotiation. At 80%, the same event is a capital call, or worse.
Look at what’s failing right now. In our market, the funds going under all have an identical profile. Floating rate bridge debt, high LTV, and a business plan where everything had to go right on schedule. When the index moved, nothing was left to absorb it.
Volatility is where cost basis comes from
None of this is a reason to stop buying.
Sellers with maturing loans can’t wait for the market to settle. They have to transact. That’s the whole opportunity, and it only exists because conditions are ugly. If prices come down or trade volume slows, both outcomes favor the buyer who is capitalized correctly and underwriting to today’s terms.
Market cycles are the job. You buy at a low basis, survive the down leg, and ride the expansion. What kills operators is not the cycle. It’s building a capital stack on assumptions from a market that no longer exists.
Go refresh your assumptions this week.
Vince
