Islamic home loans have now joined the list of mortgage alternatives as a viable way to purchase a home. An Islamic loan is a zero interest loan plan. There are many types of plans that can be used to purchase a home and most banks offering Islamic loans will have their own version of this Sharia no interest loan.
Years ago the only type of mortgage alternative was the old-fashioned land contract. The land contract was a simplified version of the now-famous seller financing deal. The land contract went out of use when some sellers and buyers were sued by the banks for breach of contract. In other words the sellers were selling the homes without proper authorization.
The buyers being very excited about their new home called the bank to check to see if the seller was making the payments. The bank was then notified of a change of ownership and the loan was called due. So the land contract was not used for years and years. The main types of mortgage alternatives are:
- Seller Financing
- Lease Option
- Creative Financing
- Islamic Loans
A mortgage alternative is any form of transfer where normal alternatives are not used. With seller financing and lease options, the bank is not involved or used. The seller in most cases simply opens escrow and makes a legal and binding contract with the buyer. Creative financing could be anything from a no down payment program between the seller and buyer to the elevation of price to cover closing costs.
Mortgage alternatives were established to help the seller and the buyer close the deal. The seller wants to sell the property and the buyer wants a home to raise their children in. As loans became harder and harder to qualify for, mortgage alternatives were created. Islamic loans on the other hand are completely opposite.
An Islamic loan must not involve any unethical behavior, hidden paperwork, or elevation of income to qualify.
What is an Islamic Loan?
An Islamic loan is a program not a loan or a mortgage. This program involves no interest being paid or earned. In some cases the home is rented in a lease option type program until paid for. The other traditional program is where the price of the home is elevated (implied interest calculated but never stated) to include a profit rate and that figure is amortized over the life of the loan. In most cases the home is financed for 15 to 30 years.
Islamic loans are based on the religion of Islam and the ways of Prophet Mohammad. Paying interest is one of the worst sins in Islam and the banks must adhere and adjust to make the program compliant with the Sharia. Most all Islamic banks have Sharia Councils that regulate how the bank or branch is run.
Ethical and honest behavior is a must. The bank must not have any dealings with alcohol or gambling either. The loans must be above board, no substandard loans are allowed, and the loan is secured by assets, usually the property itself.
Who is Offering Islamic Loans?
Islamic loans come in many types. Ahli United Bank has announced that it does buy-to-let mortgages according to the Sharia guidelines. A buy-to-let mortgage is one where an investor purchases a property specifically with the intention of renting the property out. Buy-to-let mortgages are used in the UK mostly.
The Bank of London and Middle East (BLME) has just launched a newSharia-compliant premier deposit program. This program is unique in the fact that it is more of a CD back program that takes a minimum of 50,000 pounds. This program is only available online and rates will be disclosed at that time.
Here is a list of Islamic banks worldwide. Banks in the US are:
- JP Morgan Chase
- Deutsche Bank
- HSBC
- Devon Bank of Chicago
- University Bank of Ann Arbor, Michigan
No matter which type of mortgage alternative you choose, Islamic home loan financing just may be the most attractive. Although the rates do tend to be slightly higher in some cases, Islamic financing is based on ethical conduct. Ethical conduct in today's financing market is hard to come by.
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