Locking down a mortgage can be tricky for any buyer, but for Muslim home-buyers, there's another hurdle to get past: Koranic law forbids paying and receiving interest (known as "riba" in Arabic), so if practicing Muslims want to buy homes, they can't go the traditional bank route. (Thanks to NPR's Planet Money for bringing this to our attention.)
[Note: This story was first published in May 2016.]
Muslims have historically gotten around this hurdle by either renting indefinitely, paying for homes with large amounts of saved-up cash, or chipping in with friends and family to buy properties, says Gemala Afifi of Ijara Community Development Corporation, an Ann Arbor, Michigan-based nonprofit that helps Muslims buy homes without using conventional mortgages. ("Ijara" means rent in Arabic.)
There are, in fact, several Islamic-friendly lending programs that help Muslims buy homes with Sharia (or Muslim law)-approved financing that doesn't technically charge interest the way a bank would. Here's how it works with Ijara CDC, for example: A trust is created for each customer (and for each property), which is made up of funds from investors, and the trust buys the home outright. The property then belongs to the trust and customers get into a rent-to-own situation; with every passing year the customer owns more of the house.
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Afifi says it has the same terms as a regular mortgage, usually up to 30 years. "But it's just a nature of the culture for people to want to pay things off, and to own houses in full faster, so they often pay it off in 10 or 15 years." Once you buy the property outright, the trust can become yours (for making future purchases), says Afifi, and you can even take out home equity lines of credit or refinance while you're paying off the house. Should you choose to refinance through a regular bank, there will be interest, but not if you do it through Ijara CDC. You also still get tax credits by using the IRS's form 1098, she says.
"It's always going to be a little more expensive to do it this way," says Afifi. There's extra paperwork involved, additional costs for the company, and as a result, the rates tend to be slightly higher. "If the bank is offering 3.875 percent interest, you're likely to pay closer to 3.99 percent here." Though, technically, it's not considered interest, but rent. (And the companies have imams who've approved their methods—some give testimonials on their websites).
Guidance Residential, a Virginia-based company that lends in New York, is another company that does this kind of thing. Through their Declining Balance Co-ownership program, the buyer and Guidance Residential co-own the property. The home buyer than makes monthly payments to Guidance, too. Part of the payment is a "utility fee," and the rest is payment toward increasing ownership of the property.
NPR's Planet Money focused specifically on University Bank in Michigan, a success story, since they have managed to sell $850 million worth of Islamic-compliant mortgages (the company works with Freddie Mac). The loans are available in New Jersey, but not NYC. Larger banks, like HSBC, which have tried to offer similar options for buyers, have stopped.
Perhaps, unsurprisingly, these types of loans are less common in New York City than other parts of the country. While Freddie Mac and Fannie Mae buy Sharia-compliant mortgages from select originators, they cap the amount for all mortgages on single-family homes at $417,000, a pretty low price for many New York City neighborhoods. Co-ops are usually trickier—none of the lenders work with co-ops directly, they say—so, according to Afifi, her company has only worked with buyers in New York who are buying condos and single-family homes. Their investors simply don't want to work with co-ops, she says. And the complexity of both the co-op system and the Islamic loan system make them rather incompatible.
We asked a handful of mortgage bankers if they'd ever seen these in New York, and none of them had. Mazen Farnesa, a real estate broker in Queens, says he tries to steer Muslim clients toward taking out conventional loans, even with interest. Several prominent imams have said it's okay (not "haraam," or forbidden) he says, "especially if you're making a profit, which you are when you buy a home."
Farnesa says that the cost of going the interest-free route is too costly. "They're doing the same thing but charging more to be considered halal," he says.
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