There are circumstances when religious practices forbid potential homeowners from entering the housing market in a traditional way. Fannie Mae issued a report on how some lenders are creating ways homeowners can access the market without compromising their practices.
According to the report from Fannie Mae, certain religious groups, including Orthodox Jews, are not able to pay interest because of their religious practices. As a result, lenders have found alternatives to help them purchase and keep home. University Bank, for example, has made roughly $850 million worth of loans in 16 states that are particularly acceptable for Muslim borrowers, according to the report.
Additionally, American Finance House LARIBA, a California-based financial institution, has worked to finance and refinance non-interest or “riba free” (RF) faith-based mortgages since 1987. Fannie Mae reports that LARIBA and other community shareholders own the full-service RF bank, Bank of Whittier, which provides retail banking services to all 50 states like checking and savings accounts, and offers non-interest financing, including home financing and refinancing.
To offer the loan, first, the bank determines whether the value of the property accurately reflects home pricing in the area. Rather than relying on traditional appraisals – which look at sales prices of comparable local homes – LARIBA and the customer collaboratively research prevailing monthly rents for similar properties in the same neighborhood, the report said.
Although conventional and other Islamic banks use interest as an index to calculate the monthly payment, LARIBA uses comparable rent payments. Rental properties – not money – provide the basis of its finance model. (Traditional Judeo-Christian-Islamic values prohibit renting money via interest.) If the rate of return on investment (ROI) is high, then LARIBA invests in the property and reduces the market rent to make the monthly payment competitive with payment on a loan from another bank. If the ROI is very low, that signifies an overpriced home and LARIBA does not invest in it.
To ensure that the property sale is in the buyer’s interest, LARIBA’s due diligence also includes assessing whether the property is overvalued or undervalued by tracking the prices of certain commodities – such as wheat or gold – against the price of the home.
Should LARIBA and the buyer agree to move forward, LARIBA establishes a lien with the customer that progressively applies rent payments to ownership of the property? The buyer’s monthly rent goes toward repayment of the full cost of the home and the house principal. Over time, the buyer’s percentage of ownership in the property increases, until the buyer finally owns the home outright.
This arrangement satisfies the needs of a buyer who does not want to pay interest, and it can apply to financing for other purposes – such as buying a car or supporting a business.
Fannie Mae is an investor in the property. LARIBA acts as a representative to close the deal, funds it out of its own funds on behalf of Fannie Mae, and then delivers to Fannie Mae for warehousing. LARIBA also can deliver the instrument to an investor – including Fannie Mae – allowing it to support more home purchases.