When Your Apartment Refinance Won't Size
The new loan comes in below your payoff. Here is every real way to close the gap, with the trade-offs lenders will not volunteer.
When an apartment refinance won't size, the debt service coverage limit is almost always the cause: today's rate makes the payment too large for your NOI. The fixes are bringing cash to pay down the loan, a longer amortization or HUD 223(f)'s lower DSCR, subordinate debt or preferred equity, extending the current loan while you raise NOI, or a bridge loan. Each trades cost, time or control for loan proceeds.
Why it won't size
A lender sizes a refinance three ways, by loan-to-value, by debt service coverage and sometimes by debt yield, and lends the lowest. On loans written when rates were much lower, the DSCR limit is usually the one that binds. Your building may be worth more than when you bought it and still not support a payment large enough to retire the old loan.
The DSCR math is short. Divide underwritten NOI by the minimum DSCR to get the most annual debt service the lender allows. Divide that by the loan constant (the annual payment per dollar borrowed at the rate and amortization) to get the maximum loan. Every fix below works on one of three levers: more NOI, a lower required DSCR, or a smaller loan constant.
See how far you are from sizing
Enter NOI, the loan you need, the rate, the amortization and the lender's minimum DSCR. The grid shows your coverage and the maximum loan across a range of rate moves and NOI changes, so you can see whether you are one small NOI gain away or a rate cut you cannot count on.
DSCR sensitivity grid
Estimates only, not a loan quote.
Read the grid by row and column: the row where you clear the minimum at today's rate is the NOI you need, and the column where you clear it at today's NOI is the rate you would need. If neither is realistic within your maturity date, plan for one of the options below. You can share the grid or send it to us for quotes.
Six ways to close the gap
1. Bring cash: the cash-in refinance
Pay the difference between the payoff and the new loan at closing. It is the cheapest money in the deal, since it carries no rate, and it gives you the cleanest new loan at the best spread, because lower leverage often prices better. The cost is the opportunity cost of that cash and the concentration of more of your equity in one building. If the gap is small relative to your equity, this is usually the right answer.
2. Lower the loan constant: longer amortization or interest-only
A longer amortization lowers the annual payment per dollar borrowed, which raises the loan the same NOI supports. Using a hypothetical $600,000 of underwritten NOI and a hypothetical 6.25% rate:
| Amortization | Max loan at 1.25x | Max loan at 1.15x |
|---|---|---|
| 25 years | $6,063,644 | $6,590,917 |
| 30 years | $6,496,489 | $7,061,401 |
| 35 years | $6,813,422 | $7,405,894 |
Interest-only helps less than people hope. Many lenders still size the loan on the amortizing payment and offer interest-only as a cash flow benefit, not as extra proceeds. Where a lender does size on interest-only, expect lower maximum leverage and a higher coverage requirement. Ask each lender which payment it sizes on.
3. HUD 223(f): lower DSCR, longer amortization
HUD's 223(f) refinance program allows up to 87% loan-to-value at a 1.15x minimum DSCR on market-rate properties (90% and 1.11x on affordable properties), with amortization up to 35 years. Both levers move at once, which is why a deal that fails agency sizing can pass HUD. The trade-offs are real: the process takes months longer than an agency loan, the payment includes an annual mortgage insurance premium that HUD counts in its coverage test, third-party report requirements are heavier, and the program carries ongoing HUD oversight. It fits owners with time before maturity and a long hold. Read HUD 223(f) loans for program detail and HUD 223(f) vs Fannie Mae for the comparison.
4. Add subordinate capital: supplemental, mezzanine or preferred equity
Layering capital behind the first mortgage fills part of the gap without your cash. The options differ:
- Agency supplemental loans are a second loan from the same agency on the same building. They are designed for adding proceeds after NOI has grown under an existing agency loan, not for rescuing a first loan that does not size, since the combined loan still has to meet the agency's coverage and leverage tests. See Fannie Mae supplemental loans.
- Mezzanine debt is secured by your ownership interest, not the property. Agency first mortgages restrict it, so it pairs more often with bank, CMBS, life company or bridge first loans.
- Preferred equity invests in your ownership entity with a priority return and often control rights if things go wrong.
All three cost more than the first mortgage, and mezzanine and preferred equity can take control of the building if you miss their terms. Use them when the gap is temporary and the plan to grow NOI is credible.
5. Extend the current loan and raise NOI first
If the gap closes with a realistic NOI gain, buy time instead of capital. An extension from your current lender typically costs a fee and often a paydown, and may come with cash management. Use the time to push rents to market on turnover, add or recover utility income through ratio utility billing, cut concessions, appeal the tax assessment and rebid insurance. Lenders underwrite a trailing-12, so a rent increase signed in month 11 counts for little: start early. See loan extensions for what lenders ask for.
6. Bridge to a later permanent loan
A bridge lender sizes on the business plan and the value, not today's coverage, so it can usually take out your current loan. You pay a higher floating rate, buy an interest rate cap, and owe an exit fee in many cases, and you take refinance risk again in two or three years. Bridge makes sense when there is real work to do, like units to renovate or occupancy to recover. Test the exit first with the bridge takeout calculator.
Comparing the options
| Option | Lever | Main cost | Main risk |
|---|---|---|---|
| Cash-in refinance | Smaller loan | Your cash | Equity concentration |
| Longer amortization | Lower constant | More interest over time | Slower paydown |
| HUD 223(f) | Lower DSCR and constant | Time, mortgage insurance, reports | Maturity arrives before closing |
| Mezzanine or preferred equity | More capital | High coupon or return | Loss of control |
| Extension | Time to raise NOI | Fee, paydown, cash sweep | NOI does not grow |
| Bridge loan | Different sizing basis | Higher rate, cap, fees | Second refinance risk |
Before you choose, check the NOI the lender will use
Half the time, the gap is partly an underwriting gap. A lender adds a vacancy floor, a management fee even if you self-manage, and replacement reserves, and it trends taxes and insurance forward. Run your trailing-12 through the T-12 underwriting calculator to find the lender's NOI before you negotiate. Then pull a clean rent roll with the rent roll analyzer, since loss-to-lease, concessions and delinquency are where underwriters cut income.
If you are within a few points of the minimum DSCR, shopping lenders also matters. Coverage minimums, the vacancy floor, the reserve per unit and which payment is used for sizing all differ by execution. The same building can size differently at two lenders.
Frequently asked questions
What DSCR do I need to refinance an apartment building?
It depends on the program. Freddie Mac Conventional Small requires a minimum 1.25x. HUD 223(f) allows 1.15x on market-rate properties and 1.11x on affordable properties. Banks and other lenders set their own minimums. The ratio is measured on the lender's underwritten NOI, not your statement, so a building at 1.30x on your books can fall below 1.25x once the lender's adjustments are applied.
Does an interest-only period help my loan size?
Often less than expected. Many lenders size the loan on the fully amortizing payment and treat interest-only as a cash flow benefit. Lenders that size on interest-only payments usually cap leverage lower and require higher coverage. Ask each lender which payment it uses to size the loan before you count on interest-only to close a gap.
Is HUD 223(f) worth it just to get more proceeds?
It can be, if you have time and plan to hold. HUD 223(f) allows a lower DSCR and up to 35-year amortization, which together can raise proceeds meaningfully. In exchange, closing takes longer than an agency loan, the payment includes an annual mortgage insurance premium, and HUD oversight continues for the life of the loan. If your loan matures soon, you may need an extension to get there.
Can I use a second loan to cover the shortfall on an agency refinance?
Not usually at closing. Fannie Mae and Freddie Mac restrict outside subordinate debt on the property, and their own supplemental loans are designed to add proceeds after NOI grows, with the combined loans still meeting coverage tests. Mezzanine debt and preferred equity pair more readily with bank, CMBS, life company or bridge first loans. Check your loan documents and term sheet.
How much NOI do I need to refinance without bringing cash?
Multiply the loan you need by the annual loan constant at the new rate and amortization, then multiply by the lender's minimum DSCR. That is the underwritten NOI required. Compare it to the lender's view of your NOI, not your own statement. The DSCR sensitivity grid on this page shows the result across rate and NOI changes.
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