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A Financing Plan for Faithful Muslims

April 22, 2001|From Inman News Features

Figuring out conventional home financing options is tough enough, but strict followers of the Islamic faith have no conventional options.

That's because the Koran restricts its followers from engaging in any type of financial transaction in which interest is paid for a debt--including mortgages.

However, a recent agreement between Freddie Mac and a Pasadena-based financial institution could help millions of American Muslims buy homes while still remaining true to their beliefs.

Freddie Mac recently bought $1 million in contracts from American Finance House-LARIBA, which has developed a home financing model for Muslims. American Finance is the first Islamic institution to become a seller and servicer for Freddie Mac, which buys mortgages and packages them into securities that are sold to investors.

American Finance's loan products are offered in accordance with state and local laws, and its loans are serviced in the same manner as conventional mortgages are. The basic difference is that the bank and its borrowers negotiate monthly payments based on the property's sale price and fair market rental value, instead of interest payments.

Freddie Mac spokesman Brad German said Muslims make up a significant market for mortgage loans. Seven million Muslims live in the United States.

Freddie Mac is in discussions with other financial institutions that also cater to the Muslim community. "It's certainly going to be a growing market," German said.

Other small Islamic banks also provide mortgages for Muslims, but until now, they have not had access to such large mortgage fund suppliers as Freddie Mac and Fannie Mae.

How it works: American Finance forms a partnership with the home buyer through a lease-to-own arrangement. The agreement is interpreted into conventional loan documents to comply with consumer protection laws.

Freddie Mac's investment allowed American Finance to increase the number of mortgage loans available, lower minimum down-payment requirements and increase repayment periods from 15 to 30 years.

An American Finance spokesperson said the company requires a down payment of at least 20%. The maximum loan amount is $275,000.

Borrowers can make a larger down payment to lower monthly payments, which usually equal about 80% of the home's rental value, the spokesperson said.

Islamic law prohibits "riba," which generally refers to money that increases in value without being tied to a tangible asset, such as interest on a debt. LARIBA stands for "no riba."

American Finance's Web site includes links to the parts of the Koran that apply to debt and offers its theory of money and financing.

"Money is not a commodity. It is a measuring scale. It also does not reproduce. It only grows when used in an economic activity," the Web site states. "Money is man-made--LARIBA is not money lending, it is actual financing of a tangible asset."

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