Fannie Mae funds aid Muslim buyers

In an effort to promote homeownership among observant American Muslims, Fannie Mae has committed $10 million in home financing originated by American Finance House LARIBA, an Islamic financial institution.

Financing options are limited under Islamic law, which prohibits “riba” -- the paying or collecting of interest on mortgages and other types of debts. The recent agreement between Fannie Mae and the Pasadena-based financial institution is expected to provide much-needed liquidity to American Finance, which seeks to help meet the growing demand for homes among Muslims who want to make the purchase in accordance with their beliefs.

Under American Finance’s home financing model, the financial institution forms a partnership with the home buyer through a lease-to-own arrangement. After agreeing on the fair rental value of the home, the home buyer typically puts down 20%. American Finance and the buyer own the home together, but the buyer buys back shares of the home over, for example, 20 years.

Because the financial institution owns more of the house than the buyer, the buyer pays a greater monthly share in the beginning years of the contract. Over time, the buyer, who now owns a greater share of the home, pays less.

Agreements between American Finance and the buyer are interpreted into conventional loan documents to comply with consumer protection laws.

If the buyer sells the home before the 20 years are up, any profit is kept after paying back the original “shares” of the home to American Finance.