Alternative Homebuyer Financing Options

This week, the Minnesota Homeownership Center looks at two alternative homebuyer financing options geared toward whose religious beliefs prohibit the payment of interest (specifically Muslims), and those who don’t qualify for a U.S. social security number.

We’ll look at non-interest-bearing financing first. To be clear, this does not mean you can get a traditional mortgage with zero-percent interest. It simply encompasses alternative options determined by Islamic scholars to be free of interest payments.

In Islamic law, the term riba’ is used to mean unwarranted gains, interest or usury. The Qur’an forbids riba’ because it symbolizes profiting at another’s expense or making money from money instead of from tangible assets. The prohibition of riba’ limits the financial transactions in which some Muslims can participate. This has led to the development of financial products that avoid riba’.

There are three models of non-interest-bearing financing products: 1) Murabaha, an installment sale arrangement; 2) Musharaka, a co-ownership arrangement; and 3) Ijara, a lease-to-own arrangement.

Murabaha is an installment credit agreement for the sale of tangible goods. In the home purchase transaction, the seller acquires the home, which the buyer then agrees to purchase at some point in the future. The seller is entitled to a profit as long as the exact markup is disclosed in the contract, and buyer payments may be spread out over time.

Musharaka is an equity partnership, where each partner contributes capital to the home purchase, though not necessarily in equal amounts. The partner with the larger investment has proportionally more control over any decisions that are made, and absorbs a larger percentage of any potential losses. Profit-sharing ratios must be specified in an agreement.

Ijara is a leasing agreement where the owner of the home transfers its use to a lessee in exchange for cash payments. The owner receives a profit as compensation for assuming the majority of the risk in the transaction.

The costs associated with non-interest-bearing financing products compared to each other or compared to interest-bearing loans may differ. For example, some up-front costs may be more expensive. Further, such products don’t always work with down payment assistance programs. Fortunately, buyers can work with a homeownership advisor to evaluate their options.

A full guide to non-interest-bearing financing products in Minnesota, including a cost breakdown comparison between an FHA mortgage and a Murabaha transaction, is available on the Minnesota Homeownership Center website at hocmn.org/NonInterestFinancing.

Now let’s turn our attention to Individual Taxpayer Identification Number (ITIN) loans. There are many reasons why an individual may not qualify for a U.S. social security number, despite living and working in the United States. Green card holders, for example, are non-citizen permanent residents with the right to legally live and work in the U.S. inde¬finitely. Recent immigrants pursuing citizenship are another group, as are non-immigrants living in the U.S. for a specific period of time. An Individual Taxpayer Identification Number facilitates the collection of taxes on income earned by these individuals.

Anyone may purchase and own property in the United States, regardless of residency or immigration status. For those without a social security number, however, securing a traditional mortgage is very difficult. In response, some lenders have created ITIN mortgages.

ITIN mortgages typically have more flexible underwriting criteria, allowing for alternative income verification and alternate credit history considerations. Down payment requirements tend to be higher, and down payment assistance programs often cannot be utilized.

As with non-interest-bearing financing products, the services of a homeownership advisor can make navigating the ITIN loan process smoother and easier for homebuyers utilizing this financial tool. A full guide to ITIN Mortgages, including providers offering ITIN loans in Minnesota, is available on the Minnesota Homeownership Center website at hocmn.org/ITIN.

Homeownership is possible. We can show you how.

For more information on the Minnesota Homeownership Center and its advisor and education services, visit www.HOCMN.org.