Getting ready to Apply for Islamic Finance
The most common question when applying for an Islamic loan is "Am I qualified"? So let's take a look at what the qualifications are for an Ijara™ transaction and what you can do to prepare yourself if you are not quite ready now. Also see Common Mistakes that could affect your credit.
Simply put, one must have reasonable credit, enough money in current accounts to satisfy the down payment, closing costs and reserves, and sufficient income to afford the monthly payment.
The three main issues regarding qualification are:
- Credit - The minimum credit score to qualify for an Ijara™ transaction is 640. In some cases a lower score for an Islamic loan can be financed but all approval works on a case by case basis and is subject to the underwriter’s discretion. More information on credit and how to improve your score can be found in the credit section under the general information tab.
- Down payment - There is a seasoning requirement for all monies used for the down payment, closing costs and two month reserves. Basically, you must have enough funds in the beginning and ending balances in your accounts for two months. Any large deposits have to be verified and proper supporting documentation sourcing those deposits provided. It is possible to receive some gift funds for an Islamic finance transaction, provided the gifts are from family members. However, these cannot be used if the property you are purchasing is an investment or second home. We would suggest not making any transfers or large deposits during the course of your application without first contacting us to make sure you have the proper document trail. Nothing is more frustrating to all parties than when a customer suddenly makes a large deposit. It’s important to understand the source of funds for several reasons. First because of restrictions in the Patriot Act, and second because the underwriters have to verify that there is no repayment required on the funds since that impacts your debt to income ratio (DTI).
- Income - During the final approval process, the underwriter needs to confirm you are purchasing an affordable home. For this purpose there is a DTI calculation, which must be below a certain percentage. This varies depending upon the program you apply for. Ideally your DTI ratio will be below 39%, but could go as high as 45% and in some rare cases an exception for up to 50% can be made. The DTI ratio is calculated by adding up all of the minimum monthly payments on your debts i.e. car loans, student loans, credit card payments, etc. and dividing that total by your gross monthly income.
You will also need to get all your documents in order, here is a list of what you will need:
1) Your Residence History including:
- Your previous addresses for the last 2 years
- The length of time you’ve lived in each place
- If you currently rent, your landlord’s name and address
2) Your employment history including:
- The names and addresses for ALL your employers for the last 12 months
- The dates you worked at each place of employment
- Any gaps in your employement with explanations
3) All Outstanding Loans and Credit Cards. For each account you will need this information that can generally be obtained from your Credit Report:
- The creditor’s name and address
- Your account number
- The current total balance you owe
- The amount of the monthly payment
- How many months left to pay
4) Savings, Checking or Investment Accounts. For each account, you will need this information that we can obtain from copies of your account statements: )
- The name and address for each financial institution
- Your account number
- The Current balance or value
5) Real Estate You Currently Own. For each property, you will need to know
- The property address
- The estimated market value
- The outstanding loan balance (s)
- The amount of your monthly payment
- The amount of your monthly rental income (if applicable, a copy of the existing lease)
6) Personal Property You Own. You will need to know
- The net cash value of your life insurance
- The make, year, and value of your automobiles
- The value of your furniture or other personal property
You can view the specific requirements for each Islamic finance program to determine whether or not to apply or you can contact us and we would be happy to help you look at your options, you can also view house buying tips by Jeff Ostroff. Also see Benefits of adding a Non-Working Spouse or Few Benefits of Putting Your Non Working Spouse on an Islamic Loan