| Home Finance - IJARA Frequently Asked Questions |
1.) Most people who have low down payments need something called private mortgage insurance. How do you deal with this? If you have it, who is paying for the PMI? 1.) Most people who have low down payments need something called private mortgage insurance. How do you deal with this? If you have it, who is paying for the PMI? SHAPE™: The SHAPE™ Ijara mortgage alternative program requires 20% downpayment, therefore PMI is not required. back to top 2.) How does property and casualty insurance work in the SHAPE™ program? SHAPE™: Ostensibly, programs like SHAPE™ should incorporate this into the lease. But, we have found it impossible, at this time, to provide reasonable protection at an economic cost. Moreover, all states, give you the consumer, a priority to select your own asset protection insurance since you will ultimately own the property. And, you will find that you can usually acquire the insurance more cheaply than we can. At this time, our providers grant you an agency to acquire the residential insurance under your favorable conditions. back to top 3.) What do I do about the interest that some state laws require to be paid to me on certain accounts including escrow accounts? SHAPE™: SHAPE™ providers are obliged by law to make these payments to you. The consensus of the scholars is that you should pay such interest earned to charity, but it will not count as either zakat or sadaqat. back to top 4.) What is rent based on in a SHAPE™ transaction? SHAPE™: Each SHAPE™ provider has a different approach to this issue and some may offer you more than one way of doing it. The general Shariah’a principle is that rent rates should be mutually agreed by both parties. In some cases, the provider may use a standard interest oriented benchmark like LIBOR or the 5 year Treasury Note. At this time, the consensus of the Shariah’a scholars is that such benchmarking is not ideal, but it does not affect the Shariah’a compliance of the transaction. back to top 5.) What happens if I do not make my payments on time? SHAPE™: You will be charged the cost of collection. We currently work with an independent servicing company called Midwest Loan Services to manage the completed SHAPE™ acquisitions. They bill their banks $50.00 as their cost of collection. Any excess over the cost of collection that one of the banks receives will be donated to charity. back to top 6.) What is the minimum down payment in the SHAPE™ program? SHAPE™: The minimum down payment, which we call the initial payment on account because of the structure of the SHAPE™ Ijara program, is 20%. back to top 7.) May I use down payment assistance programs? SHAPE™: SHAPE™ providers currently permit the use of various down payment assistance programs so long as you come up with at least 5% of the cash to fund your initial payment on account. back to top 8.) Do your providers refinance existing mortgages? The SHAPE™ process may be used to replace an existing mortgage. back to top 9.) How does a SHAPE™ replacement compare to a standard mortgage refinancing? SHAPE™ : Generally, the nature of a replacement is distinct from a refinancing, and the title will transfer from a current borrower owner to a trust which will own the home for the benefit of the new investor. back to top 10.) What happens if I am short of cash for closing costs on my refinance transaction? SHAPE™: Depending upon the investment for which you qualified, amounts, other than the 5% of the expected final purchase value may be structured into the value of the Promise to Purchase. back to top 11.) May I sub-lease the property? SHAPE™: Sub-leasing requires approval from the Bank and may cause a higher rent. back to top 12.) Sometimes other groups seem to offer very competitive and close to the outside rates, SHAPE™’s 5 year rate seems to be above the norm. For e.g., a conventional bank’s standard mortgage might be offered at a lower rate. Why is this? SHAPE™: With respect to the University Bank 5 year rate, this is the same offer that a conventional consumer will receive at the bank for a comparable standard mortgage transaction. Historically, the five year offers from different institutions range widely. back to top 13.) Is an Adjustable Rate Lease susceptible to gharar? SHAPE™: The scholars over time have allowed a great deal of flexibility in fixing lease rates, which may be fixed for the duration of a tenancy, subject to changes in inflation or other indexes, or changed periodically according to mutually accepted terms. back to top 14.) Some people say that in both the Islamic and the traditional mortgage systems, the price of the house is simply the discounted future value of the house plus a rent for staying in that house...nobody will let you stay in the house for free. SHAPE™: This is not correct. In the traditional mortgage system, interest is the “rent” of money and is paid for a loan of money with which you buy a house or refinance an existing loan. There is no rent of the house as you own the house. back to top 15.) How is the SHAPE™ Ijara MALT™ lease rate determined? Why is it based off the 5yr T-Bill? How does this gauge the market? Is there anything else that can be used to gauge the market other than an interest rate? SHAPE™: All SHAPE™ providers must quote you a lease rate based on an independently verifiable benchmark. Sadly, no Islamic benchmarks for either property or commerce have been developed and made easily accessible. Therefore, SHAPE™ providers either use the Treasury Bill or LIBOR indexes. It is our hope that alternatives will be forthcoming and we do periodically dialogue with our peers in the global Islamic financial services about what should be done to construct the alternatives. In the meantime, the T-Bill gives you a means to verify rental rates quoted by UIFC. back to top 16.) Is there any reason the Ijara MALT™ is a 5/1 ARM? Currently, UIFC prefers a five year adjustable rent program. Other providers are considering three and seven year alternatives; and we are all working together to develop fifteen and thirty year fixed rent programs. The investor preferences are ultimately determined by regulatory and secondary market preferences. back to top 17.) What exactly is it that is wrong (haram) with insurance? SHAPE™: The concept of insurance is viewed differently in Shariah and is more like, but not the same as mutual insurance in the US. The conventional structure of insurance is to pay money today for the prospect of money tomorrow against a loss of assets or life. This is similar to the forbidden riba. In Islamic mutual insurance, or Takaful, the approach is to pool resources together to assist one another in the event of a future loss. Regrettably, there is no longer a Takaful program available to protect assets, and without any form of casualty insurance, there are no investors. As a result, it is a condition of necessity, for the SHAPE™ program to incorporate conventional casualty insurance. back to top 18.) Aren’t you just changing the word interest to profit or rent? SHAPE™: There are three acceptable approaches to home acquisition in Islam. One is a sale, one is rent to own, and one is partnership (with property rental as part of the deal). The rent paid is explicitly for the use of property. Or in the sales case, the profit is a mark-up on a base sales price. The mark up on a sale or the rental income from leased property may both be expressed as a percentage (%) of invested capital. For example: if the bank earns $10,000 of rent from a $100,000 investment in a house then the bank has a 10% income or yield expressed to you as a 10% lease or profit rate. Riba, however, is the payment of money for the use of money over time, and this is very similar to the concept of interest in a traditional mortgage loan. An accountant may argue that rent in the latter two and profit in the former is interest, but in none of these cases is it riba. Some accountants argue that anything that may be perceived as generating a benefit from the passage of time has interest in it. The Shariah scholars have not defined riba in this way, rather riba necessarily relates to loans of money or exchanges of money like commodities when they are used as money. back to top 19.) Isn’t the Islamic system of purchasing houses the same thing, the same mechanics, as the traditional mortgage system only with different labeling? SHAPE™: This too is inaccurate. The process of qualifying a consumer and disclosing costs and risks to a consumer is the same as the mortgage system. This process is regulated by federal and state statutes in the United States. Hence, the paperwork is the same or very similar prior to and after making the acquisition, but not the acquisition itself. The acquisition mechanics are fundamentally different without creating all of the same rights and obligations as in a traditional mortgage. Hence, it is not a question of labeling, but of actual structure. back to top 20.) Someone told me that the papers one signs to apply for and process a purchase with a mortgage alternative are the same as in the traditional mortgage system, why? SHAPE™: The documents that one signs, which should normally be customized to reflect the facts of a mortgage alternative, including the application, disclosures, and post closing disclosure documents are mostly governed by federal and state rules. In fact, UIFC has gone to great expense to modify its documents to reflect correctly the Islamic transaction in compliance with applicable law. Generally, the government wishes to assure that you are fully aware of the details of a transaction and can compare it to other transactions of a similar nature. Islamic scholars now agree that these required disclosures help reduce or eliminate gharar. These materials do not constitute the contract that binds you, the house and the bank or other parties involved. back to top |
