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Mission

Overview
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Example

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MISSION: 

THE MISSION OF AMERICAN FINANCE HOUSE – LARIBA - IS TO USE OUR BEST EFFORTS TO PROVIDE “LaRiba” FINANCING ALTERNATIVE TO THE CONVENTIONAL “Riba” SYSTEM. THE “LARIBA” FINANCING OFFERED IS DESIGNED TO COMPLY WITH BOTH THE ISLAMIC SHARIAA AND THE STRICT UNITED STATES GOVERNMENT LAWS AND REGULATIONS. Please Click Here  for fatwa-based procedure.

CHANGING THE LAWS OF THE UNITED STATES IS CERTAINLY NOT PART OF OUR MISSION.

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OVERVIEW:

Our home financing model is based on the concept of “Lease-To-Purchase” (LTP) (Ijara Wa Iqtinaa/Diminishing Musharaka). This is done as the basis for calculating the monthly payment and marking the value of the property to the market. This is the uniqueness of the LARIBA model. If the house is overpriced, the model will flag this fact to the homebuyer in order to go back to renegotiate a lower price or to wait till an existing market “bubble” is burst. 

The model assumes that AFHL would purchase the property jointly with the client. Normally on a joint lease to purchase basis, AFHL would purchase the Property with the client and agree to sell its share/units to the Purchaser.  However, as the Purchaser has agreed to re-purchase AFHL share/units of the property immediately, AFHL authorizes the Purchaser to undertake the purchase of the property from the vendor and register it directly into his/her name. The model further assumes that the client leases AFHL’s share in the property and agrees to repurchase/repay AFHL’s share at cost without adding any time-value for the repayment over a mutually agreed upon period of time (“Financing Period”) up to 30 years.  The monthly REPAYMENT OF CAPITAL (“RofC” – pronounced rofsee) diminishes AFHL’s share and increases the share units of the client gradually to reach 100% at the end of the Financing Period.

The property has a market value, which is best defined by its lease value if it were leased on the open market. The property is assumed to be leased at fair market value as defined by the location and specifications of the property and as mutually agreed upon between the client and AFHL. Our process requires that the client check with at least three real estate agencies in the market about the fair market lease rate for a similar property in the same neighborhood. AFHL does the same checking process independently. Then the client and AFHL get together to agree on a mutually acceptable fair lease amount/value. This lease value is used as the foundation for the calculation of the monthly payment. The mutually agreed upon fair rental value is divided between the client and AFHL in the same proportion of their units/share of the purchase price of the property. As the client buys back the share units of AFHL every month, he/she increases his/her share in the property, which in turn reduces the share of the rental value to be paid to AFHL. This part of the payment is called RETURN ON CAPITAL (“RonC” – pronounced Ronsee.)

The client’s total monthly payment consists of the sum of RofC and RonC. This way, the model allows the client to finance a home based on marking the property to the market fair rental value, as sanctioned by Islamic Jurisprudence.  SEE THE ATTACHED DETAILED NUMERICAL EXAMPLE.

American Finance House LARIBA uses a proprietary computer program; ISLAMABAD III, which is third generation software developed by LARIBA originally in 1995 for a client after he consulted with a reputable Muslim scholar at the Islamic University in Islamabad, Pakistan. The model incorporates the principles described above and generates a level/equal payment over the Financing Period in order to lower the required payments in the early years and make it convenient to the budget of the new homebuyer.

In order to comply with the US laws and financial regulations specially the “Truth in Lending Law” and rules pertaining to the tax deductibility of home mortgages, AFHL takes the monthly payment obtained from the Lease-To-Purchase model above and inputs it into a traditional mortgage program to obtain the “Implied Interest Rate” as required by the US laws. This allows AFHL to disclose such a rate and complete the standard documentation as required by the US Federal and State Banking and Consumer Lending Laws.

A LARIBA Financing Agreement that describes the relationship between AFHL and the client and the basis for calculating the monthly payments and rate of return is an important part of the documentation. However, in order to conform to industry standards as well as US and State government tax and regulatory requirements, the home financing transaction uses traditional purchase financing/mortgage documentation. The client owns title to the property, which benefits the client.  The client benefits by having title to the financed property regardless to what happens to AFHL in the future and the ability to benefit from tax deduction.

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DOCUMENTATION:

1. LARIBA Financing Agreement, which describes the relationship of AFHL and the client as agreed upon and as described above in details. 

2. Standard application package and disclosure documents.

3. Promissory Note that indicates the amount of financing, the required monthly payments, and the imputed (implied) interest rate of the transaction.

4. Deed of Trust.

5. Other required regulatory documentation relating to Truth in Lending, non-discrimination, servicing of the financing, etc.

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EXAMPLE:

Assumptions:

1. Cost of Home $150,000.

2. Down Payment available from client - $30,000 (Down payment can be as low as 5%.  However, in this example, we are assuming 20%).

3. Period of Financing – 15 years (Repayment periods can be up to 30 years as mutually agreed upon by client and AFHL).

Determination of Return on Capital, RonC:

The first step is to determine the fair rental value to be able to determine the Return on Capital (“RonC”). If we assume the client surveys the market and obtains estimates for similar properties in the same neighborhood for $900, $1,000 and $1,100 per month; and AFHL does the same process independently and discovers rents of $1,000, $1,100, and $1,200 per month. Then the two parties will negotiate together, out of their own free will, and reach an agreed upon rental value that will be fixed for the entire period of financing. For this example, we will assume $1,000 per month is the value agreed upon. 
Given a rental value of $1,000, the client would pay AFHL rent in the first month of $800 based on its share of 80%. This is the first payment of “RonC” or the Return on AFHL’s Capital. The amount of “RonC” will decline each month from $800 to eventually zero as the client buys back the shares of AFHL.

Determination of The Repayment of Capital, RofC:

Assuming that the client contributes 20% ($30,000) of the $150,000 home value with the remaining 80% ($120,000) contributed by AFHL.  Then conceptually, the client owns 20% and AFHL owns 80%. With a mutually agreed upon Financing Period of 15 years (180 months), the client would make monthly installments sufficient to repay the $120,000 over the 180 months.  The amount paid each month is calculated by AFHL’ proprietary program.

Total Monthly Payment:

Using the Fair Rental value, Amount contributed by each party and the financing period, AFHL’s Payment Calculation Program calculates a level (fixed) payment which consists of both the Return on Capital and Repayment of Capital.  The payment will remain fixed for the entire 180 months of the financing.  The following is an excerpt of such a an amortization schedule:

Note: The amounts shown above are presented as an example to show how the payment calculation process is applied and are not intended to be a quote.  Also the figures do not reflect the amounts paid for taxes, insurance, and homeowner’s association (if applicable) which could add several hundred dollars to the payment.  YOUR FINANCING WILL LIKELY HAVE DIFFERENT PAYMENTS.

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