In the name of Islamic Financing
Still confused about Islamic financing? Have lots of questions? You have the Scholar’s ruling but still doubtful? Give this article a read. I have shared my experience with Guidance Residential (US Islamic home financing provider).
Last year I started looking into home mortgage and as I was looking for different options, Islamic financing caught my attention. There are many Islamic home financing provider in USA like Guidance Residential, University Islamic Financial, Ijara Loan, Lariba and Devon Bank. Among many lenders Guidance Residential is well reputed and also endorsed by AMJA. After initial research I visited them. Discussion started with a basic question of how it differs from a conventional mortgage. I had around 3 to 4 meetings with them and here is the gist of all the discussion.
- Guidance Residential (GR) offers Co-Ownership program. They will form a Limited Liability Company (LLC), Borrower and GR will be the partners of that LLC. Here’s one small detail you won’t notice until signing of the contract that the LLC fees will be paid by the borrower. It is around $13 per month.
- Many mortgage companies do not service loans and they sell mortgages in a secondary market. (I believe that’s how small mortgage companies make money). GR is no different. GR will sell your mortgage to Freddie Mac shortly after the contract signing. According to GR, they don’t sell money for money, as this is prohibited in Islam. Instead, they will sell LLC shares to Freddie Mac.
- They will not charge you interest but the usage fees of the house. So, if you own 10% of the house, the borrower will pay the usage charges of 90% of the house (Co-Ownership program)
- Guidance Residential (GR) will not put a lien on borrower’s property if they stop paying their mortgage.
- If the house goes into foreclosure, Guidance Residential (GR) will suffer the loss. For example, if you borrowed $200,000 loan and out of that, you have paid $20,000. If house foreclosed for $100,000, GR will get those $100,000 and bear the loss of $80,000 and you will lose $20,000.
- If for a genuine reason, the borrower cannot continue the monthly payments, GR will give relief for 6 months to 1 year without accumulating the interest. After that time period, monthly payments will be resumed from where it was left earlier. Rather, there is a flat late fee for the administrative expenses.
Even though it looked pretty convincing, but I had mixed feelings about it. Honestly, to understand this whole convoluted process was overwhelming for me. Anyway, I signed the contract with them and here goes the other part of the story.
One of their associate answered, APR is only used to calculate usage fees. That doesn’t make sense, does it? If GR doesn’t deal in interest, then why even use a system that is totally based on interest. This is deceiving as they are actually calculating interest.
Higher Mortgage Rate.
They usually offer higher mortgage rate as compare to any conventional mortgage company. I would say their rate is not even competitive. You would see a significant difference in rates.
If your down payment is less than 20%. Conventional bank allows PMI (Private Mortgage Insurance), it is an amount that borrower pays on top of the monthly payment. As soon as your ownership reaches 20%, borrower stops paying PMI and that results in a reduction of monthly payment. Due to some incomprehensible reasons, GR doesn’t allow PMI. They add it to the APR that increases the monthly payment. So even if your ownership reaches 20% or above, it won’t reduce the monthly payment, as it is part of the interest/profit.
At the time of the official contract signing
The lawyer told me that this contract is same as any other conventional mortgage contract. The only difference is the word “profit” instead of “interest”. It was shocking as I was expecting to have all those points in the contract that were explained to me earlier. I was hesitant to back out at that time. First, I was exhausted with the whole process. Second, even if I decided otherwise what other mortgage options would I have?
Freddie Mac comes into play
after a few days of signing the contract, I got a letter from Freddie Mac that they have purchased the mortgage loan (As mentioned by GR). Despite of their rational explanation, I still have doubts about this. As I have no means to verify their statement, I believe them. Isn’t it what they call an Ignorance Fallacy?
So, how about now? Clear as mud? Yeah, I think so too 🙂 There are no right or wrong answers here. It boils down to one thing – self-satisfaction. If you want to go with Guidance Residential just for the sake of inner peace. I totally understand that because that’s what I did. Good Luck!