An Islamic halal loan is a loan that is riba free (interest free) and one that follows the Sharia guidelines. What many home owners do not understand is that an Islamic loan can be applied for by non-Muslims. It should also be understood that the phrase, "Islamic Loan" is used only for
further clarification in this article. The word loan is never used in the transaction.
According to The Bank of Whittier, one of the few true Islamic Banks in America, "We do not rent money, we invest in you. Socially responsible, faith based and riba free." This in a nutshell will explain to you what an Islamic Loan or transaction is. An Islamic mortgage is based on the Islamic religion that dictates that no interest can be paid or charged. Islamic mortgages or credit is possible because a group of investors have jointly deposited their money for the good of society.
This investor group can and may lose money as well as make money due to the philosophy based by the scholars. If there are bad loans then the group will lose money. With no interest involved the bank will charge a profit rate and an application fee.
Types of Islamic Loans Available
Islamic loans or transactions will mainly include two types. Those two types are "Murahaba and Ijara." Murahaba is where the bank purchases the home and sells it back to the buyer with an added profit cost. The Ijara is where the bank purchases the home and rents the home to the borrower using a declining rental basis.
Islamic Bank or Finance Company Using the Islamic Finance Method
As there are very few true Islamic Banks in America, Muslims are allowed to seek help from other sources such as finance companies or banks following the Sharia ruling on home purchasing. The Bank of Whittier services all 50 states not just their surrounding communities, but some may prefer a local source for funding.
There is a fatwa about purchasing a home from a regular bank through the law of necessity. This ruling allows Muslims who have no other alternative to take an interest bearing loan. This should be a Muslim's absolute last choice. With more and more banks and finance companies following the Islamic finance method, purchasing a home has become easier.
Paperwork Required
As with any loan or transaction for a home you can expect to show the last 2 to 3 years of taxes. You will need to prove income or job also. Proof of money in the bank, length of marriage and information on the home itself will also be required.
Normal paperwork for any loan would require an accepted contract of sale, agreement for a credit report to be pulled and payment for an appraisal report. If the home does not appraise, their is no loan possible.
Down Payment Options
Most companies or banks will require a minimum of 20% down to purchase a home. Some finance companies such as LARIBA are accepting as little as 5% down though. With 5% down the buyer of the property must pay PMI (Private Mortgage Insurance). Make sure when agreeing to PMI that the insurance is one through takaful (Islamic Insurance) and not a regular PMI company.
Fees to Expect
Noor Islamic Bank in Dubai, UAE charges a 1% fee for application. This could add up substantially on large loans. If you consider a regular loan though, most banks closing fees can add up to 3 to 6% of the loan amount. With this in mind consider what is required and needed in applying for a loan. Noor Islamic Bank is just one source, other banks may charge considerably less.
Most banks and finance companies charge appraisal fees, escrow fees and normal closing costs. Look for a company that is competitive with normal lending costs. Noor Islamic Bank recently came up with the unique Fit for Life Credit Card using the takaful concept. This concept uses joint money from investors who may make or lose money on their investment. The same concept is used on home loans and insurance.
Expectations When Applying for Islamic Mortgage
In the end understand that banks are running to the Islamic Mortgage field for one reason and that is money. The Muslim borrower feels trapped as this is the only way they have to purchase a home. The bank realizing the need raises the cost to accommodate the borrower in most cases. The borrower should check multiple sources and compare rates. Most sources that I checked had a huge difference in programs, down payments and profit percentage.
Islamic mortgages are something that is being debated and there are many fatwas (decrees by scholars) both in favor and against. Although Islamic loans can be used by anyone they are mainly established for the Arab society who seeks to remain within the religious guidelines. It is always best to look to other alternative means also such as seller financing or lease options.
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