Islamic beliefs forbid paying or collecting interest, so the financing of homes by members of the Islamic faith requires some creative "lending" techniques.
A New York Times article discussed three types of financial programs that have been used by Muslims. The articles states:
In a Murabaha loan, the bank buys the house and gradually sells it to the home buyer, with an additional profit rate tacked on.
In an Ijara loan, one of the most common, the bank buys the house and leases it to the buyer, who pays off the home, plus market-based rent for living there.
The third form, called Musharaka, creates a shared-equity partnership between bank and buyer to purchase the house and gradually transfer shares of its ownership.
Stewart's Bulletin SLS2008002 describes the structure of Sharia-Compliant transactions:
An example of this type of program involves the participation of Guidance Residential, LLC (the Financier) in residential transactions. The individuals (Consumer) who are acquiring or refinancing on a residence will sign a Co-Ownership Agreement with a single purpose LLC established to facilitate the "Islamic Home Acquisition (or refinance) Transaction."
The LLC will be a Co-Owner of an undivided interest in the Land with the Consumer, by being named in the vesting deed from a third party seller, or by being a grantee from the Consumer (on a refinance). The undivided interest in the Land owned by the LLC will decline as payments are made by the Consumer. The documents will include:
- Co-Ownership Agreement. This agreement is not recorded, but it is referred to in the vesting deed. This agreement must include substantially the following subordination provision in Paragraph (6): "The rights of the Consumer as specified in this Co-Ownership Agreement are subject and subordinate to the lien interest granted in the Security Instrument."
- Obligation to Pay (by Consumer to Co-Owner), which agrees to pay Profit Payments.
- Non-Recourse Note (by Co-Owner as Borrower to Financier, e.g. Guidance Residential, LLC).
- Co-Ownership Assignment Agreement (from Co-Owner to Financier).
- Security Instrument (Insured Mortgage) by Co-Owner and also executed by the Consumer (both spouses where applicable) as an Accommodation Party, securing the Non-Recourse Note.
- Vesting Deed that includes the Co-Owner as a grantee (and the Consumer on a third party sale to the Consumer).
- Deed from Co-Owner, subject to Co-Ownership Agreement, to Consumer to be recorded after the Security Instrument, if the parties consider that it will facilitate more generous real estate tax exemptions (such as in Texas). Note you should not represent what real estate tax exemptions the Consumer will be entitled to, and we recommend you consider a written disclaimer regarding the availability of real estate tax exemptions.
- Assignment Agreement from the Co-Owner to the Financier.