Interest/Riba-Free Residential Home Loan Alternative
Need a reliable way to purchase a home without paying interest? Our Faith based financing options will give you peace of mind, and help you find financial freedom while having the opportunity to own your home. Consult with one of our advisors to explore some of the most common interest-free mortgage options.
Interest/Riba-Free Home Loans
Residential mortgage loans are generally for properties between 1-4 units, and are legally intended for personal, family, or household use. This loan type, which has been the standard for homeowners since the 50s, is mostly secured by a mortgage, deed of trust, or other equivalent consensual security interest on a house. But what about mortgages for those who can't pay interest? Are there other ways to finance a home while still abiding by one's faith?
Absolutely! An increasingly popular option for financing a home is what is known as an "interest/riba-free mortgage". While this is often how this is known, the reality is that interest/riba-free mortgages can form in several different legal structures to accomplish the same goal.
The most common form is:
- Rent to Own
- Uses a Trust
As a community-oriented organization, we advise against NINA, NINJA, or SISA loans, as financial regulations today have virtually eliminated these unreliable programs.
- One to four units
- Owner-occupied — up to 30 years with 3.5% minimum down payment depending on the circumstances
- Owner-occupied — rural housing or military benefits with as little as 0% down payment
- Investment — up to 30 years with 20-25% down payment; may require proof of financial reserve that can last for about 6 -12 months; up to 10 properties per customer with conventional terms; unlimited properties with portfolio terms
- Loan Amounts — most of our investors offer to finance around $50,000 to $2 million
- Available for properties under construction or renovation
- Specialty Halal Medical Financing with 0% down payment
- Specialty Stated Income Investment Property
- Five or more units are considered commercial real estate
Application Requirements for US Customers
For individuals who are W-2 employees:
- W-2 forms and Federal Income Tax Returns from all employment sources of the borrowers for the last two years
- Paycheck stubs for the last two months
- Bank or investment statements for the last two months
- Copy of ID and work authorization in the US (passport, social security card, driver’s license, visa, etc.)
- Copy of purchase agreement (if available)
For people with self-employment income:
- Same items as above
- Personal and Business Federal Income Tax Returns for the last two years
- Bank statements of your business for the last two months
- CPA Letter
- One to four units
- Owner-occupied — up to 25 years with 5% minimum down payment depending on the circumstances
- Investment — up to 25 years with 25-30 % down payment; may require proof of financial reserve that can last for about 6-12 months
- Loan Amounts — most of our investors offer to finance around $100,000 to $2 Million
- One to five-year terms only
- Private investor financing is available
- Five or more units are considered commercial properties
Application Requirements for Canadian Customers
For employed individuals:
- Most recent letter of employment (dated within the last 30 days)
- Three or four of the most recent pay stubs
- Bank statements of at least the last three months that show money is being deposited there
- How much is the down payment and where it is? If the down payment is in the Registered Retirement Savings Plan (RRSP), other investments, or a bank account, show the latest three months' history of those deposits.
- Agreement of Purchase and Sale (if you have already bought the house)
- Notices of Assessment and T4 slips for the last two years
Please note that the minimum down payment is 5%.
For self-employed people, business owners, taxi or truck drivers, and store owners:
- Self and business account statements for the last three months
- T1 general tax forms of yourself for the last two years
- Statement of Business or Professional Activities for the last two years
- Notices of Assessments for the last two years
- Copy of business license (must be at least 2 years old) (lenders make an exception in some cases)
- Copy of Articles of Incorporation (if this is a corporation)
Note: The minimum down payment for self-employed individuals is 10%.
- All pages of statements must be included if they have a page number (even if it is blank or have generic text).
- Whenever possible, please scan and e-mail documents. Send single-sided copies of the documents and do not staple the papers if you are mailing files.
- It is always best to scan IDs to get a clearer image since faxing a copy of a driver’s license makes the picture unviewable and the text hard to read.
What is ijara? Leasing to own
Ijara is a part of the sharia-compliant process which is also known as Ijara-wa-Iqtina. The process involved is quite often used to buy property and equipment. Financing using Islamic sharia-compliant methods is quite simple.
A Trust is created. This Trust buys the property and then leases it to the intended customer. A percentage or part of the monthly payments made are put towards ownership. Eventually, the customer owns 100% of the property.
There is a fundamental difference between a Western more traditional lease and the Sharia Ijarah-wal-iqtinah template. Under the Sharia-compliant process, the Trust uses a Promise to Purchase to sell the customer the property. It’s important to note that the contract does not obligate the customer to buy the property. It does entitle him to do so, however.
Determining Purchase Price & Rental Payment Numbers
This Promise to Purchase outlines the agreed to price. This number always equals the initial purchase price subtract down payment plus one dollar.
When the customer finances the initial amount, the investor does earn some profits. This generally comes through rental payments. Western calculations include amortization to arrive at the exact numbers. Sharia compliance has no problem with the formulas that are used here.
The big difference between the Western amortization calculations and an Ijara counterpart is the reverse amortization calculation used. It might seem otherwise, but under Sharia law, the profits can be described as a percentage.
For example, you purchase a home and pay $100,000 for it. Subsequently, it gets rented for approximately $250 every month. By the end of one year, you have collected $3000. The initial investment has a return of 3% which is rent on the property or Bey.
Here’s how the same numbers would play out in a more Western style transaction. You give someone the $100,000 in cash and they buy a house with that money. When they pay you the identical $250 every month, it becomes Riba. The reason is simple — the 3% is now rent on the money.
There are some other requirements that need to be taken into account like the Truth in Lending Act. This clearly lays out the fact that any profit made on residential real estate needs to be laid out as a percentage. The Act is designed so that customers understand all of the different aspects of the transaction.
Legal Implications
Under the Ijara system, you are a tenant. There is a lease you will need to sign. However, there are some differences between Islamic finance and more traditional systems. For example, you’ll need to maintain the property. In fact, your responsibilities and obligations are very similar to a homeowner.
Sell, decorate, sublet or use the home in any way it is zoned for. There’s only one caveat and that’s you don’t do anything to decrease the value of the property. Once the Promise to Purchase or lease obligations is fulfilled, you are the owner.
Sharia compliance dictates that losses or gains are shared. These transactions are put together so all of the gain goes to the customer. The percentages of their ownership dictate how these losses and gains are shared by various parties.
Preparing for lease to own applications
Ijara Community Development Corp. in Ann Arbor, MI is your reliable source for Sharia-compliant financing options. Through our licensed providers, we offer Islamic funding solutions in the USA and Canada. We take great pride in helping you get your dream home without having to worry about Riba.
To prepare for your interest/riba-free home loan application process, our team will need the following from you:
- Verification of Employment
- Verification of Income
- Verification of Assets
- Verification of Large Deposits
Why Buy a Home Through Islamic Financing
Purchasing a house for you and your family using a Riba-free financing alternative has plenty of advantages.
Let Us Help You
Our business focuses on providing you with Sharia-compliant financing alternatives so that you can purchase the real estate you want. The following are what sets us apart from our competition:
- Excellent investors who offer competitive fees and rates
- User-friendly online application process
- Professional advice and guidance from experienced Islamic financing experts
- Transparent transactions
- Easy to get in touch with
- Rent-to-own payment options that help gain equity without excessive interest
We know that it is important for you to stay on budget when purchasing a commercial or residential property. That is why we will comprehensively calculate your household income and expenses to help you live within your means.
