- February 12, 2008
- All Issuing Offices
- Sharia Compliant Mortgages
"Sharia" (rules and practices of Islam governing the practice of Muslims) compliant mortgages are designed to conform to the body of Islamic law, which does not allow payment of interest.
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.
Company Requirements (on Guidance Residential transactions):
- Require copies of all applicable documents for review.
- Require joinder in Security Instrument by Co-Owner and both spouses (Consumer). The Consumer will sign on a separate page, and you must be satisfied that the joinder by the Consumer in the Security Instrument (1) is acknowledged before a notary or otherwise completed and recorded so that it is constructive notice under state recording law, (2) clearly reflects that the spouses are encumbering their interest in the Land in accordance with state law. An example of language that is satisfactory in many states is "By signing below, the undersigned Consumer acknowledges receipt of a copy of this Security Instrument and is/are joined herein to evidence consent to the lien created hereby in the Property and otherwise for the same purposes and to the same extent as if named Trustor and Grantor hereunder so that the lien encumbers any interest of the undersigned in the Property." (Acknowledged before notary).
- Require a Satisfactory Deed from Third Party Seller to Consumer and Co-Owner if a purchase transaction, or Satisfactory Deed from Consumer to Co-Owner of an interest in the Land, subject to the Co-Ownership Agreement.
- If there is a Deed from the Co-Owner to the Consumer, subject to the terms of the Co-Ownership Agreement, the Deed should also be subject to and promptly filed for record after the Security Instrument (Insured Mortgage).
- Determine that the transaction is for purchase of the Land from an unrelated third party or is refinance of a valid mortgage on the Land.
- Require that both spouses sign all applicable documents, as required by state law.
- The Co-Ownership Agreement is not recorded.
- Verify that the Co-Ownership Agreement contains a satisfactory subordination provision (such as the above quoted provision), subordinating the rights of the Consumer to the Security Instrument.
Additional Provisions to Include In the Owner’s Policy:
- You may show both the Consumer and Co-Owner as Insureds, "as their interests may appear." (The phrase "as their interests may appear" would be added after the parties names.)
- Except to the Terms, Conditions, Rights and Interests set forth in the Co-Ownership Agreement, Security Instrument, Deed(s), and Assignment Agreement.
- Except to "Any claim that the vesting of Title to an undivided interest in the Land in the Co-Owner is not a true conveyance or is not valid, or is a mortgage or other security device, or should be otherwise recharacterized".
Additional Considerations for the Loan Policy:
- You must be satisfied that the above Company Requirements (and any other applicable requirements) are met.
- If the Company Requirements are met, you will not except to the Co-Ownership Agreement in the Loan Policy.
- The Loan Policy will describe the Security Instrument and name the Financier (not the Co-Owner) as an Insured.
- The description of the Insured Mortgage may reflect that it secures payment of the Note, and that it is additionally secured by the assignment of the Co-Ownership Agreement and Obligation to Pay, if requested.
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