Process - ijaraCDC

Process

The Application Process

  1. Pre-Qualification
  2. Ijara Programs and Rates
  3. The Application
  4. Processing
  5. Required Documents
  6. Credit Reports
  7. Appraisal Basics
  8. Underwriting
  9. Closing
  10. Summation

Pre-Qualification

Pre-qualification starts the Ijara™ process. Once the lender has gathered the necessary information about a lessee’s income and debts, depending on that it is determined how much the lessee can pay for a house. Since there are different Ijara programs, a lessee should get pre-qualified for each type.
Investors look at two key factors when reviewing applicants for these Islamic finance programs. First is the lessee’s ability to repay the lease and, second, their willingness to repay the Ijara™.
Ability to repay the Ijara™ is verified by current employment and total income. Generally, investors prefer you’ve been employed at the same place for at least two years, or at least be in the same line of work for a number of years.
The lessee’s willingness to repay using this Islamic finance method is determined by examining how the property will be used. For instance, will you be living there or just renting it out? Willingness is also closely related to your credit report and/or your rental payment history.

It is important to remember there is flexibility here and each applicant is handled on a case-by-case basis. So even if you come up a little short in one area, another strong point could make up for the weak one.

Ijara Programs and Rates

To properly analyze the Ijara™ Program, the lessee needs to consider how long they plan to keep the lease. Planning on selling in a few years? Then an adjustable lease may make more sense. A fixed lease is more suitable if you have long term plans.
Shopping for an Islamic loan can be time consuming and frustrating. There are so many programs to choose from, each with different rates, points and fees. Why not let an experienced Ijara professional evaluate your situation as a lessee and recommend the most suitable Ijaraprogram? We can help you to make an informed decision.

The Application

The application starts the paperwork of the Ijara™ process. The lessee completes, with the aid of a Ijara professional, the application and provides all the required documentation.
Various fees and closing cost estimates will be discussed and these Islamic finance costs will be verified by the Good Faith Estimate (GFE) and a Truth-In-Lending Statement (TIL) which the lessee will receive within three days of the submission of the application to the lender. These are standard government required forms.

Processing

Once the application has been submitted, the processing begins. The processor order the Credit Report, Appraisal and Title Report. The information on the application, such as bank deposits and payment histories, are then verified. Any credit derogatory, such as late payments, collections and/or judgments require a written explanation. The processor examines the Appraisal and Title Report checking for property issues requiring further investigation. The entire Ijara™ Islamic finance package is then put together for submission to the lender.

Required Documents

If you are acquiring your home and are salaried, you will need to provide the past two-years W-2s and one month of pay-stubs: OR, if you are self-employed you will need to provide the preceding two-years tax returns. If you own rental property you will need to provide Rental Agreements and the past two-years tax returns. If you wish to speed up the approval process for these Islamic finance loans, you should also provide the past three-months bank, stock and mutual fund account statements. Provide the most recent copies of any stock brokerage or IRA/401k accounts you might have as well.
If you are requesting a cash-out, you will need a “Use of Proceeds” letter of explanation. Provide a copy of a divorce decree if applicable. If you are not a US citizen, provide a copy of your green card (front and back), or if you are NOT a permanent resident provide your H-1 or L-1 visa.

If you’re applying to replace your existing mortgage you will need to provide a copy of your first mortgage note and deed of trust as well as the documents already mentioned. These items will normally be found in your loan closing documents.

Credit Reports

Most people applying for a home loan don’t need to worry about the effects of their credit history during the Ijara™ process. However, you can be better prepared if you get a copy of your Credit Report before you apply That way, you can take steps to correct any negatives before making your application.
A credit profile refers to a consumer credit file, which is made up by various consumer credit reporting agencies. It is a picture of how you paid back money you have borrowed, or how you meet other financial obligations. There are five categories of information on a credit profile:
  • Identifying Information
  • Employment Information
  • Credit Information
  • Public Record Information
  • Inquiries
Race, religion, health, driving record, criminal record, political preference, or income are not included here. If you have had credit problems, be prepared to discuss them honestly with an Ijara™ professional who will assist you in writing your “Letter of Explanation.” Knowledgeable Ijara professionals know there are legitimate reasons for credit problems, such as unemployment or illness.
If these issues have been corrected and your payments have been made on time for a year or more, your credit may be considered satisfactory.
The mortgage industry tends to create its own language and credit ratings are no different. BC Mortgage Lending gets its name from grading one’s credit based on such things as payment history, amount of debt payments, bankruptcies, equity position, credit scores, etc. Credit scoring is a statistical method of assessing the credit risk of an Islamic loan application. The score looks at the following items: past delinquencies, derogatory payment behavior, current debt levels, length of credit history, types of credit and number of inquires.
Most people have heard of credit scoring. The most common score (now the most common terminology for credit scoring) is called the FICO score. It was developed by Fair, Isaac & Company, Inc. for the three main credit Bureaus; Equifax (Beacon), Experian (formerly TRW), and Empirica (TransUnion).
FICO scores are simply repository scores meaning they ONLY consider the information contained in a person’s credit file. They DO NOT consider a persons income, savings or down payment amount. Credit scores are based on five factors: 35% of the score is based on payment history, 30% on the amount owed, 15% on how long you’ve had credit, 10% percent on new credit being sought and 10% on the types of credit you have. These scores direct applications to specific loan programs and levels of underwriting such as Streamline, Traditional or Second Review, but they are not the final word regarding the type of program you will qualify for or your interest rate.
Many people in the mortgage business are skeptical about the accuracy of FICO scores. Scoring has only been an integral part of the loan process for the past few years (since 1999); however, the FICO scores have been used since the late 1950’s by retail merchants, credit card companies, insurance companies and banks for consumer lending. The data from large scoring projects like mortgage portfolios demonstrate their predictive quality and that the scores do work. The following items are some of the ways you can improve your credit score:
  • Pay your bills on time.
  • Keep Balances low on credit cards.
  • Limit your credit accounts to what you really need. Accounts that are no longer needed should be formally canceled since zero balance accounts can still count against you.
  • Check that your credit report information is accurate.
  • Be conservative in applying for credit and make sure that your credit is only checked when necessary.
A lessee with a score of 680 and above is considered an A+ lessee. A loan with this score will be put through an “automated basic computerized underwriting” system and be completed within minutes. Lessees in this category qualify for the lowest rates and their loan can close in a couple of days.
A score below 680 but above 640 will cause underwriters to take a closer look in determining potential risk. Supplemental documentation may be required before final approval. Lessees with this credit score may still obtain “A” pricing, but the Islamic loan may take several days longer to close.
Lessees with credit scores below 640 are normally not able to get the best rate and terms. These loan types usually go to “sub-prime” lenders. The loan terms and conditions are less attractive here and more time is needed to find the best rates.

Therefore, when you have derogatory credit, all of the other aspects of the loan application need to be in order. Equity, stability, income, documentation, assets, etc. play a larger role in the approval decision. Various combinations are allowed when determining your grade, but the worst-case scenario will push your grade to a lower credit level. Late loan payments and bankruptcies/foreclosures are the most important factors. Credit patterns, such as a high number of recent inquiries or more than a few outstanding loans, may signal a problem. Since an indication of a “willingness to pay” is important, several late payments in the same time period is better than random late, according to conventional industry thought.

Appraisal Basics

An appraisal of real estate is the valuation of the rights of ownership. The appraiser must define the rights to be appraised. This expert does not create value, but only interprets the market to arrive at a value estimate. As the appraiser compiles data pertinent to a report, consideration must be given to the site and amenities as well as the physical condition of the property. Considerable research and data collection must be completed prior to the appraiser arriving at a final opinion of value for any Islamic finance transaction.
Three common approaches all derived from the market formulate the opinion, or estimate of value. The first of these is the COST APPROACH. This encompasses what it would cost to replace the existing improvements as of the date of the appraisal, less any physical deterioration, functional obsolescence and economic obsolescence. The second method is the COMPARISON APPROACH, which uses other “bench mark” properties of similar size, quality and location that have recently sold to determine value. The INCOME APPROACH is used in the appraisal of rental properties and has little use in the valuation of single family dwellings. This approach provides an objective estimate of what a prudent investor would pay based on the net income the property produces.

Underwriting

Once the processor has put together a complete package with all verifications and documentation, the file is sent to the lender. The underwriter is responsible for determining whether the package is deemed an acceptable loan. If more information is needed the loan is put into “suspense” and the lessee is contacted to supply more information and/or documentation. If the loan is acceptable as submitted, the loan is put into an “approved” status.

Closing

Once the loan is approved, the file is transferred to the closing and funding department. They notify the broker and closing attorney of the approval and verify broker and closing fees. The closing attorney then schedules a time for the lessee to sign the loan documentation.
At the closing the lessee should:
  • Bring a cashier’s check for your down payment and closing costs if required. Personal checks are normally not accepted and if they are they will delay the closing until the check clears your bank.
  • Review the final loan documents. Make sure that the profit rate and loan terms are what you agreed to. Also, verify that the names and address on the loan documents are accurate.
  • Sign the loan documents for your Islamic finance transaction.
  • Bring identification and proof of insurance.

After the documents are signed, the closing attorney returns the documents to the lender who examines them and, if everything is in order, arranges for funding. Once the loan has funded, the closing attorney arranges for the Ijara™ Lease, Option/Promise to Purchase, mortgage note and deed of trust to be recorded at the county recorders office. Once the Ijara has been recorded, the closing attorney then prints the final settlement costs on the HUD-1 Settlement Form. Final disbursements are then made.

Summation

A typical “A” Ijara™ transaction takes between 14-21 business days to complete, but you should allow for up to 4 weeks. The new automated underwriting process speeds up the process. Contact one of our experienced marketing agents today to discuss your particular Ijara needs or fill out the Pre-Qualification Form and a licensed broker or representative will promptly get back to you.