Learning More About Islamic Mortgages

Islamic home loans are becoming as normal as conventional loans in the UK, Middle East, and now America. These mortgage alternatives are here to stay.

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

 What is a Mortgage Alternative?

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

Mortgage Alternatives are Many

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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Islamic Financing Ruling on the Use of the Law of Necessity

Islamic Finance must include the law of necessity as it pertains to Muslims purchasing homes as dictated by the Shariah and Muslim scholars.

Islamic finance dates backs hundreds of years ago where the very essence of real estate began. Islamic finance is the way to purchase homes without any interest and is more of a rent to own type program. Both the main types of Islamic finance are explained here along with seller financing, a third type of creative financing acceptable in Islam.

First it should be stated what the Sharia states about usury and its punishments. The committee of scholars, headed by Dr. Yusuf Qardawi met in Detroit, USA in 1999 to discuss and explain what is meant by "The Law of Necessity." The committee stresses, according to what has been agreed upon by the Muslim Ummah, that usury is forbidden. It is a major sin and is one of the seven gravest ones. Those who commit it are considered to be waging war against Allah, and His Prophet (peace be upon him*).

Fatwas were issued to accommodate Muslims living in non-Muslim countries. These fatwas are not according to Islamic traditions of Prophet Mohammad. It is up to each Muslim to pray and ask for Allah's guidance in the matter of home purchasing. 

What is the Ruling on "The Law of Necessity"in Islamic Finance?

Dr. Yusuf Qardawi stated that a Muslim may use a interest bearing mortgage if all other means of purchasing a home Islamically has been exhausted and that the borrower has an extreme emergency or necessity.

The meaning of this statement is that a Muslim can take out a bank mortgage and pay interest if he has exhausted every possible means to purchase a home in the halal (permitted) way, such as seller financing, rent to own, Islamic banking and borrowing money from relatives.

Muslims should not resort to going against Prophet Mohammad's commandments halfheartedly. A mortgage should be the absolute last resort. A bank mortgage is only permissible when there is a necessity such as:

• No rental is available in a good area.
• The rental is too expensive.
• There is great harm for the Muslim family.

The fatwa goes on to state that this type of loan is only possible when the purchaser has no other property and has no means to purchase the house any other way. This type of loan is only meant to strengthen the Muslim to practice Daawa (spreading of Islam) and not worry about financial woes.

Seller Financing Explained

Seller financing is a mortgage that is held by the seller and allows the buyer to purchase the home without bank approval. It is an alternative to conventional methods and can be structured to include no interest at all. Seller financing is basically just a contract of deed written in easy terms for both the buyer and the seller to understand.

Through seller financing, the seller will contact an escrow company to handle the payments and escrow account and both the buyer and seller feel at ease with this no pressure type of sale.

What is Islamic Banking?

Islamic banking and finance has to do with two types of loans. These loans are not called loans
at all and the word interest is never used. It is a formal way of purchasing a home Islamically
and is the best way for a Muslim to purchase a home. These two ways are called:

• Ijara Declining Rent Agreement
  Murahaba Islamic Mortgage 

These two agreements are basically equity sharing type products. The Islamic bank purchases
the home and then either rents back to the borrower or amortizes the amount of the full loanincluding an elevated price agreed upon by all parties in advance. The wording is made
simplified not to implicate a loan was every done.

Where are There Islamic Banks Located?

There are many banks doing Islamic mortgages and they should be used as a last resort. Those conventional banks doing Islamic mortgages and charging interest to normal customers are:

• JP Morgan Chase
  Deutsche Bank
  HSBC
  Devon Bank of Chicago
  University Bank of Ann Arbor, Michigan

One of the few true Islamic banks in America is The Bank of Whittier. According to Bankrate.com they have 100 million in assets and have a three star rating. The Bank of Whittier refuses to allow their fees or programs to be discussed online though.

*Muslims invoke Allah's blessings on the Prophet Muhammad whenever this name is mentioned.

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Islamic Banking and No Interest Loans - The New Hot Topics

Almost daily you will see some newspaper, blog or website talking about Islamic banking being the new "Hot Topic" of the year. Islamic finance has arrived.

Islamic banking and Islam Sharia no interest loans have become hot topics in the last year as many banks have rushed to create their own approved Sharia loan programs. According to many speculators 2011 will see more and more Islamic banks opening up to handle the new rush of applicants for these interest-free loans.

According to the Daily Monitor (January 11, 2011) "In 2011, Shall We See the Emergence of Islamic  Banking," "Recent reports have indicated that the central bank will soon move to regulate an Islamic commercial bank." This news has shown to be an immediate indicator of what is in store for 2011.

The Monitor goes on to explain how the banks are servicing Muslims, not the religion itself. With an upsurge in banks offering interest-free loans, more and more people are rushing to this basic rent-to-own program. In fact in the end the Islamic mortgage program in most cases will cost the borrower more money due to a slightly higher profit rate than a regular conventional mortgage.

This article will include many types of Islamic loans not just mortgage loans.


What is an Islamic Loan?

An Islamic loan can be obtained by anyone. It is an interest free loan that is given to anyone who qualifies. Islamic loan qualifications are tougher than regular conventional loans due to the fact that the loan must be assured of success. The borrower is looked at very strict to see that this one purchase is secure.

Islamic loan applications cannot be falsified as compared to some conventional loan deals where the income is elevated. Islamic finance is built on religious backing and requires certain ethical guidelines as set up by the Sharia commitee. No substandard loans (B loans) are allowed, no interest and the owner must occupy the home.

The two types of Islamic mortgage loans are called:

• Murahaba
• Ijara.

These programs are not called loans on the paperwork due to the Sharia rulings. The program that is closest to Islamic belief is the Ijara program as it is merely a rent-to-own program. It is called a declining rent program due to the fact the rent decreases as the amount owing on the mortgage decreases. Murahaba is where the bank buys the home and inflates the price with a profit rate that has been established by the bank or finance company and then allows the borrower to make monthly payments until the loan is paid in full. The programs differ from bank to bank and so do the fees. Some banks charge a higher application fee and a lower profit rate and vice versa.

Borrowers should be careful of banks offering lower application fees as the profit rate over 30 years may be substantially higher.

Ethical Loans – Are They Worth Their Weight in Gold?

The requirements for any Islamic financing are:

• No interest.
• No investment in gaming or alcohol.
• No substandard mortgages.
• All investors take part in profit and loss.

 With these ethical standards in place, banks are also obligated to pay a portion of the money in
zakat (charity) to the poor.

What is an Islamic Loan and Why Does the Law of Necessity Matter?

An Islamic loan is a usury-free loan obtained from an Islamic bank. The Muslim may cite the law of necessity is used as justification.

An Islamic loan contains no interest (usury) in any shape or form, except when the law of necessity is used as justification to purchase a home. Often, an Islamic Loan will end up costing more than a regular interest-bearing loan (averaging 1% more) due to the complications surrounding the overall setup of an Islamic loan. It is important to understand the guidelines established by the Sharia before accepting an Islamic loan from a non-Islamic bank or government.

Many banks are digging deep and setting up Islamic-type loans to attract business and make money off of Muslims who have no other way to purchase a home. Some Muslims have become consumed by the ways of the world instead what the Quran and hadith (words and deeds of Prophet Mohammad).

What is an Islamic Mortgage?

An Islamic mortgage is one that is open to everyone, not just Muslims. A true Islamic mortgage will come from a halal (Islamic Bank) that never deals with any type of interest, including on checking accounts. An Islamic mortgage deals with the two main kinds of Islamic mortgages called:

● Ijara Declining Rent Agreement
● Murahaba Islamic Mortgage

What is Usury?

Usury is an Islamic term for interest. Interest is forbidden in Islam and it's regarded as one of the worst sins. Muslims are not allowed to receive interest, nor can they pay interest. Therefore, Muslims cannot charge interest to anyone, nor can they accept interest garnered from an interest-bearing checking account, for instance. In Islam, all forms of interest must be avoided.

Islamic Financing Fatwas

There are many fatwas — legal pronouncements in Islam — and not all fatwas are legitimate. The sharia has stated that interest is haram (forbidden) and that it leads to the hellfire. They also said, that usury should be avoided in every possible way, and yet some have developed a different interpretation of this particular fatwa. Some Sheiks are telling members that using an Islamic mortgage is okay if:

● the Muslim does not like his present home;
● the Muslim is unable to move to a new home; or
● the Muslim is desperate to buy a home and cannot save the money.

They go further to state that a loan with mortgage is acceptable if the individual's need is extreme and local banks fail to offer an Islamic mortgage program. Other Muslims firmly believe that this contradicts Islamic belief, arguing that it goes against the very hadith that warns Muslims to stay away from interest. It's widely believed that Muslims should never borrow from a bank where the word "interest" is used.

According to Abu Hurayrah, "Allah's Messenger (peace be upon him*) said, 'On the night when I was taken up to Heaven I came upon people whose bellies were like houses and contained snakes which could be seen from outside their bellies. I asked Gabriel who they were and he told me that they were people who had practiced usury." (Al-Tirmidhi Hadith 2828)

The Law of Necessity Excuse in Islamic Financing

According to a group of scholars in Detroit, headed by Dr. Yusuf Qardawi, Muslims may purchase a home with an interest-bearing mortgage if it is deemed an emergency or necessity. It's said that Muslims must first try to buy a home through every other means possible. Those means would include:

● Ijara declining a rental agreement
● Murahaba Islamic mortgage
● Seller financing
● Lease option
● Borrowing from family and friends

Many Muslims are flocking to non-Islamic banks and governments to purchase homes, just because the phrase "Islamic financing" is mentioned. A true Islamic loan cannot be obtained through any bank that deals in interest. The purchasing of a home must be based on the same premise as having a checking account or a savings account. .

It is important to differentiate between a family being in danger and necessity. The Muslim must consider whether it's a necessity to own a home or whether it's merely the shaitan (devil) tempting him or her to imitate the non-believers? As in all things, it's believed that Muslims should pray salat ul Istikhara before making any decision and then depend on Allah for the guidance.

Purchasing a home in any society must be a choice that devout Muslims ask carefully. Desiring beautiful homes to compete with the "Jones" must be weighed against the desire to follow Islam  and its teachings. Is it wrong to purchase a home in today's times? This is something only Allah can answer.

* Muslims invoke Allah's blessings on the Prophet Muhammad whenever this name is mentioned.

Resources:
MacCharles, Tonda, (January 20,2008) "Muslim Leader Calls Sharia Loans a Con Job," The Star. Retrieved August 7, 2010.
Wiseman, Paul (March 28, 2008) "Islamic Loans turn profit for banks in the USA" in USA Today.
Retrieved August 7, 2010.
Watkins, Simon (July, 15, 2003) "Keeping the Faith" on ThisIsMoney.com. Retrieved August 7, 2010.


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What to Expect When Applying for An Islamic Interest Free Loan

The real estate market is hot and the new trend is to follow the Islamic Halal (allowed) loan programs. Islamic loan guidelines are explained in full here.

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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Banks Offering Loans to Muslims - The New Trend in Financing

A few years ago finding an interest free Islamic loan was near to impossible in America and other countries. A new financial trend has changed that now.

Banks, financial companies and even states are offering Islamic loans. Why has this new financial trend erupted? Plain and simple, it is all to do with money, the "Golden Goose." Countries all over the world are now getting involved in Islamic lending. Australia has recently announced their intention to offer Islamic loans causing mass panic in the small banking market.

How can small finance companies compare with states and countries offering loan packages to Muslims and others desiring to get into the new market? Banks realized that there was a lot of money to be made on Arabs or Muslims who had no other way to buy a home have now joined the new trend. The new trend is not first time home buyers programs, but banks looking for fatwas (decree by a learned scholar) and scholars to open their own "Islamic Interest Free Branch."

Why are Banks Interested in Islamic Loans?

Besides seeing a huge way to make money on the Arab population, banks also realize that an Islamic loan comes with many restrictions on the Muslim itself. Islamic loans come with strict guidelines such as:

• No illegal paperwork can be done.
• No short-sales (usually).
• Community support for late payments.
• No sub-standard mortgages.
• Homes are purchased with security measures in tact.

Muslims everywhere want a mortgage, but according to Sharia guidelines, the Muslim household must be very sure that there is no danger of loss. Islamic banks rarely if ever short sale homes and will instead give charity to the borrower if the borrower loses their job.

Large non-Islamic banks may not grant zakat (charity) payments to the borrower, but realize the potential of the borrower having fear of Allah. No Muslim can go to heaven with a debt owed. This premise alone will make most Muslims strive extremely hard to maintain the loan to the best of their ability.

Minnesota Offering Islamic Loans

Besides banks jumping into the Islamic loan program, states are now offering loans. Last year Minnesota announced that they too would be offering Islamic loans. This caused great concern in the financial community as smaller loan companies could not compete with a large state run program. There was talk of suing the state for monopolizing the market.

What is a True Islamic Mortgage?

The best type of Islamic loan or mortgage is one involving an Islamic bank who does not have or benefit from interest in anyway. This would mean that no regular bank could open a branch just to attract borrowers. Even though the branch is following the Sharia guidelines that have been in place for centuries, this bank would be second choice.

Finding a true Islamic bank is the problem for many Muslims, so fatwas were issued giving alternative choices to purchase homes. A Muslim or non-Muslim may purchase a home with  interest if there is a due hardship forcing them not to be able to rent in the area they are in. This fatwa is called the "Law of Necessity." This fatwa should only be used in the worse of situations and not to be entered into lightly.

The second choice is an alternative bank offering Islamic loans following the Sharia guidelines. There are many places all over the world honoring this now. Read this article on places available for Islamic loans: Where are the Islamic Banks Located in America.

Types of Islamic Mortgages Available

There are two main types of mortgages available. The first and main type is "Murahaba." With this type of mortgage, the bank purchases the home and resells the home back to the borrower at a profit to the bank. This profit rate usually is comparable to conventional interest rates or slightly higher.

The second type of plan available is "Ijara." With this plan the borrower can rent to own the property with a declining rent schedule. They do not own the property until the property is paid in full. Scholars have stated that this plan is the most acceptable in Islam.

A Muslim's Dream Fulfilled or His Worst Nightmare

The truth in lending act requires all financial companies to disclose the terms of all loans and I suggest any person seeking an Islamic loan to contact the bank prior to filling out an application for a loan.

Few banks and financial companies publish their rates online other than Noor Islamic Bank in Dubai, UAE. Fees vary from financial company and may be reflected in the rates charged. Some will charge a higher application fee and a lower profit rate. A new borrower seeking to own a home may well look into seller financing as a mortgage alternative also.

Resources

● "Muslim Bank Loans in Australia: Halal or Haram?" (June 14, 2009) Ozsoapbox
● MacCharles, Tonda, (January 20,2008) "Muslim Leader Calls Sharia Loans a Con Job,"
The Star
● Ahmed, Imaduddin "What if the world had been following Islamic financial practices?"
(January 7, 2011) Guardian

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