What Are Muslim Mortgages? Seller Financing Explained in Detail
An
Islamic mortgage is a mortgage that has no interest at all on the loan. Muslim
mortgages and Islamic mortgages are the same exact thing.
Seller financing used to be the only way for a Muslim to buy a home. The goal of home ownership is very strong with all individuals and the Muslim is not exempt from this desire. So as the desire grew for Muslim mortgages, more and more banks started offering them.
An Islamic mortgage or Muslim mortgage has some requirements though. The mortgage cannot come from a bank that charges interest to other clients. So a Muslim could not take a mortgage from Wells Fargo Bank, just because they came up with a "glorified" Islamic mortgage deal, except where the law of necessity is involved.
Some banks are offering what they claim to be a Muslim mortgage and then they write the words, "for only 2.9%" per year. This is not an Islamic mortgage at all. In an Islamic mortgage, the words percent or interest cannot be anywhere in the contract or transaction.
Murahaba Islamic Mortgage
With this type of transaction, the bank buys the home that the buyer desires and then sells the home back to him at an elevated price. So if the bank buys the home for $200,000, they may sell the home back to the buyer for $225,000 (as an example only) and then amortize this amount over 20 years or more.
The buyer is normally required to put a fairly large down payment down on the loan and may be as high as 30%. The buyer is happy owning a home according to their religious practices and the bank is happy as it has made a profit. In this transaction, the buyer gets the title transferred into their name.
Ijara Declining Rent Agreement
The Ijara declining rent agreement is where the bank buys the property and sells it back to the buyer at the same price amortized over a period of time. The buyer also pays a declining rent to the bank till the loan is paid in full. This rent amounts to what would actually be the interest on the loan.
The bank structures the agreement to show high rent in the beginning and as the amount owed is less, the rent is less. The words interest or percentage are never used. The bank holds title to the property until the loan is paid in full.
The negative side of this loan is that the buyers cannot take any tax deductions on the home, as they do not own the property for 15-20 years. The buyers are merely renting the home as opposed to the Murahaba transaction where they receive the title.
Seller Financing Explained
Seller financing is exactly what it states. The seller becomes the holder of the mortgage note. This type of transaction may be against many Islamic ways of thinking because in a way it is defrauding the bank. The seller may not notify the bank that he has transferred ownership of the property to a new buyer or the bank would call the loan due. This is "alienation" of the property and not allowed according to all banking contracts.
Due to tougher mortgage guidelines many people are resorting to seller financing as a way to own a home. This is a fairly simple thing to do. Open an escrow account and have the escrow officer draw up papers that state the seller is financing the home and renting the home to the buyers until they pay for the home in full.
The title is not transferred until the home is paid for either. The trick here is not to put home insurance in the buyer's names. A new insurance policy is always mailed to the mortgage holder as regular policy. Once the bank is notified of a new buyer, the note is called due.
The escrow officer will simply open a savings account for the buyers to deposit their money into each month and the officer pays the sellers his funds, pays the taxes and insurance and then collects their fees also. There are monthly fees to handle this account and this is usually taken from the seller's proceeds.
There are many schools of thought about which loan is the most preferred and many scholars have stated the Ijara declining rent transaction is the closest to being the correct one, but the other two types that are used are acceptable in Islam.
Resources
Wiseman, Paul (March 28, 2008)"Islamic Loans turn profit for banks in the USA" USA Today
Watkins, Simon (July, 15, 2003)"Keeping the Faith" This is Money.com
Huda, "Islamic Mortgages" About.com
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