Owners conducting an automotive property refinance are often surprised to discover how many new attractive loan programs that have become available within the last 3 years. 30 year amortization periods, stated income and cash out refinance up to 75% LTV are now on the market. However, automotive refinances are still heavily scrutinized by lenders that are concerned with the environmental status of the property. In addition, the special use nature, as well as the high level of seller financing (land contracts) further complicate and make lenders cautious.
Underwriting criteria is broken down into a few main categories – Loan to value, debt service coverage ratios, property analysis, tenant evaluation and credit worthiness of the borrower.
LTV – CLTV
Loan to value restrictions on automotive refinances are typically capped at 70% on rate and term and 65% on cash out refinances. However, there are a few lenders that will now allow up to 75% on a cash out basis. Lenders also will permit high leverage with seller held financing (sits in second lien position). The combined loan to value can be as high as 90%. For example, if the current first lien position existing convention loan is at 40% loan to value and the seller held is at 30% loan to value the owner could pull an additional 20% equity out on a cash out refinance (40% + 30% + 20% =90% CLTV).
Debt Service Coverage Ratio restrictions are typically conservative at 1:1.3 for this building type. Meaning that for every $1.30 of net income (income after taxes, insurance, repairs, etc) the property/business produces, the mortgage payment will not be allowed to exceed $1.00. Said in another way, after all expenses and the mortgage have been paid, the owner needs to net $.30 to qualify.
Due to the cash nature of this business, stated income loans, (where borrower does not have to provide tax returns) can be a solid option for owners that do not show enough net income to qualify for traditional loans. With this type of loan the DSCR discussed above is not relevant.
In the case of investment automotive refinances, tenant evaluation is very important. Lenders may request tenant financials as well as borrower financials and scrutinize the time left on the current lease; among other relevant information. In addition, many lending source will only consider owner occupant transactions.
Great caution will typically be used as market value and market rent is evaluated and compared to the subject property. Environmental status of the property will be examined and buildings constructed before 1997 will be further analyzed. Appearance, location, accessibility, and local market conditions, as well as other factors are considered.
The personal credit worthiness of the borrower will be scrutinized. 680 credit score is normally the minimum for the best finance options. Exceptions can be made (on a limited basis) as some conventional lenders will consider scores as low as 640. The overall strength of the property, tenants, net worth, DSCR, and LTV can offset concerns of low credit scores.
Every potential automotive property refinance is unique and are considered on a case by case basis. However, the above can give you a good idea of what the capital sources look for when considering funding this type of commercial loan.