Personal Finance, Loans & Insurance

There can be a lot of confusion surrounding Development Finance and what it implicates within the financial world. People tend to confuse Development Finance with Commercial mortgages, which is more than easily done as the two do tend to overlap one another. Development finance is where an individual or company/business is looking to develop property/properties and have some capital but need a short term loan to help complete the development. Depending upon the lender and the circumstance, such loans normally span between 12-24 months. Commercial Mortgages on the other hand, are usually only required once the development has been completed and additional funds are necessary. Hence, Development Finance and Commercial Mortgages do tend to overlap. Despite the “Credit Crunch”, Development Finance is rapidly becoming more main-stream and is a very specific type of finance. Development finance is an extremely active market, with businesses wanting to expand for survival during the economic downturn. There are many high street lenders out there and therefore there is a wide variety of development finance specialists available to the consumer. It is recommended that you seek professional advice in order to find the right deal for you.

Typically in the UK, Development Finance is used for various development plans such as; Property Refurbishment, New Build Projects, Property Conversions and initial land purchase and international projects. Additionally, there are various types of Development Finance which undoubtedly adds to the confusion and uncertainty surrounding the term. For example, a Senior Debt Loan usually covers the first 70% – 80% of loan to value although it can be arranged against gross development value. A Mezzanine Loan is a second charge loan on top of the senior debt loan, usually used to fund costs on one property while a developers financial resources are tied up elsewhere. Finally, Joint Venture 100% Finance contracts you with an experienced partner who underwrites the project and shares the profits upon completion.

Property development is about having a vision; it’s about understanding the market and turning that vision into a reality. However, developers often have problems getting the finance right and knowing what products are available and which lenders to use can be confusing. The forms of development finance are dependent upon personal circumstance, for example whether you are a company wishing to expand, a home owner hoping to develop, or a home owner looking to start anew. Funding is also available through this method for community projects which aim to provide; economic development, affordable housing and community development financial services. Therefore, Development Finance is determined entirely upon an individual assessment made by the lender. Lenders will look specifically at aspects of the development proposal, such as; land purchase, ground work/services, footings/base, first fix/second fix and final snagging/sign off. In the difficult current market, lenders have to be more careful when choosing which developers to back; they are much more likely to support a developer with experience in the field than someone new to the industry.

Development finance is somewhat a necessity to make your development vision a fruitful reality. No matter what particular development loan you have opted for, most can cover building costs, labour and architect/professional costs. Property development loans will be secured against the land or the property you wish to develop. Newer forms of Development Finance funds are available either for debt, mezzanines or equity in combination with primary lending sources. More traditional forms, like with Commercial Mortgages, normally require a deposit of at least 20-30%.

Loan to Value rates and interest rates vary depending upon experience and percentage of funds required for development. Benefits of this form of finance includes that each development case is assessed on its own merit and it’s a form of finance that can be raised quickly, putting your development project into fruition as soon as possible. Another advantage of this form of finance is that the lender will always be there to help manage the development programme and lend support. So, whether you intend to use your finished project as an investment or whether it’s used to help your business grow, Development finance is a fully supportive and flexible form of financial assistance to help you make that vision a reality.

“A wrap-around mortgage, more-commonly known as a “wrap”, is a form of owner financing for the purchase of real property. The seller extends to the buyer a junior mortgage which wraps around and exists in addition to any superior mortgages already secured by the property. Under a wrap, a seller accepts a secured promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.

The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee(s). Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property.
Because wraps are a form of owner financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. An example:

The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he “carries back” from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage plus a negotiated amount less than or up to the sales price, minus any down payment and closing costs. The monthly payments are made by the buyer to the seller, who then continues to pay the first mortgage with the proceeds. When the buyer either sells or refinances the property, all mortgages are paid off in full, with the seller entitled to the difference in the payoff of the wrap and any underlying loan payoffs.

Typically, the seller also charges a spread. For example, a seller may have a mortgage at 6% and sell the property at a rate of 7% on a wraparound mortgage. He then would be making a 1% spread on the payments each month (roughly, anyway. The difference in principal amounts and amortization schedules will affect the actual spread made).
As title is actually transferred from seller to buyer, wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage, if such a clause is present.”

For more great information on Owner Financing… visit Forte Properties in Austin, TX online at http://www.AustinOwnerFinancedHomes.com

As the nation’s real estate market continues to grow and new technology gains more ground, many widely accepted beliefs that were true just a few years ago may not be true today. Before you go after a home mortgage or home loan or any real estate financing, if you have a lot of bad credit because of consumer debt such as credit card or personal loans, try to eliminate or reduce this debt as soon as possible because it’ll affect your ability to qualify for a home mortgage and the estimated monthly payment.

Some tips to know: whether you’re financing or refinancing. most people move or refinance within a seven year period. And loan programs for down payments of 20% or less require you to purchase Private Mortgage Insurance (PMI).

If you’re going to buy a second home or second property, you’ll need to identify the source or sources of your down payment, since you won’t be selling your current house and using the proceeds, and you’ll need to expect a larger monthly payment for housing and other related expenses too.

If you have a problem getting a home mortgage and the seller still owes money on the home you can check with your lender and see if you can get a wraparound mortgage. Although it’s not legal in all states, it will allow you to pay the monthly payment on the existing mortgage and an additional payment to pay the difference; make sure that a wraparound mortgage will not trigger a due-on-sale clause ask the lender in advance.

Many people are not aware that they may be able to customize the length of their loans. Ask the mortgage broker or lender you’re working with. Although lenders usually advertise 15-year loans and 30-year fixed rate mortgages, applicants can ask for 20 years, 25 years or any other number of years that would work better. This may allow borrowers to build up their equity faster and keep their monthly payments in a range they can afford. Some lenders may impose strict limits on how much of the down payment can come from borrowing from other sources.

Some of the advantages of adjustable rate mortgages that are touted include: lower costs – because they are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments then if the interest rates go down, you’ll have lower payments. However in all the years I was in the real estate business I never advised anyone to get this type of loan. With the changing market trends one can find themselves in a heap of trouble just like that. This would be a last resort loan and one would have to be sure they were not going to be unemployed in the next few years.

If you’re working with a local builder within a sub-division or housing development and you’re just making carpeting, lighting and appliance selections for a brand new home, you’ll likely be able to get a standard mortgage loan. But if you’re planning to hire the contractors, electricians, plumbers, and painters, you’ll probably need a construction loan, which provides the funds to pay the subcontractors as the work goes along.

You will want to work with your mortgage broker or lender closely to develop an individual home loan or home mortgage program based on your credit worthiness. If you have or think you have a less-than-perfect or ‘bad credit’ credit report don’t worry too much about it. When financing real estate it’s important to know that a low FICO credit score doesn’t mean you won’t qualify for a home loan or home mortgage. There is much ado about the FICO score these days but there are many instances in which it isn’t going to interfere with getting a home loan or mortgage.

If you do borrow money for a down payment it must be disclosed to the lender or if any of the money for your down payment was a gift, be ready to provide proof of it.

The 20-year fixed-rate mortgages allow you to make a consistent higher monthly payment throughout all of the 20 years you have the mortgage; the shorter term means you pay the loan off quicker and therefore pay less interest and importantly, build equity faster than you would with a 30 year loan. You’ll also need to take into consideration what the closing costs will be. Ask about the escrow account for taxes and insurance.

Make sure to ask other homeowners how they’re doing and what real estate financing and home mortgage or loan pitfalls to avoid. And whatever you do don’t get yourself into a situation where you are unable to make the mortgage payments; make sure to think far ahead. Try not to get too overwhelmed with all the different home loan and mortgage choices available.

Make a list of questions and get the answers from any real estate agents, real estate brokers, mortgage lenders and any other real estate professionals you know or meet. Ask them about real estate financing, home mortgages, home loans, refinancing and current mortgage rates. Go online and get home mortgage quotes. Online quotes can often be cheaper because of the elimination of middlemen for example. And compare the quotes with other quotes you get locally to find the best rates for you.

Two million Muslims in the UK face an ethical dilemma if they want a mortgage or a loan. Conventional mortgages and loans all require the payment of interest and “riba” as interest is called under Islamic law, is forbidden by the Koran.

British financial institutions are increasingly catering for Muslims’ specialist needs through a number of alternative arrangements that respects the teachings of the Koran. Here are just two of them:

Ijara with diminishing Musharaka – the mortgage alternative.

Ijara with diminishing Musharaka is an Islamic alternative to a conventional UK mortgage and has been adopted by several British banks and building societies.

In essence, Musharaka means partnership. Under this Islamic financial concept, the bank buys the house and legally becomes its owner. Then throughout the pre-agreed period, say 25 years, a monthly payment is made. Each monthly payment includes a charge for rent and a charge that buys a small proportion of the house itself. It’s form of variable shared equity plan with the proportion of the house being owned by the purchaser, steadily increasing as payments are made. Once the final payment has been made, the house is owned outright. Ijara

Here you tell the bank or financial institution what you want, for example a car, and they buy it. In return for a monthly payment that covers the cost of the bank’s capital, the bank then allows you to use the asset for an agreed period. In reality, it’s a form of leasing

Islamic finance is not widely available in the UK – so where can find it? Here are three suggestions:

Over the last few years Lloyds TSB has introduced Islamic products to 33 of its branches. Their spokesperson says, “It’s important for our customers to see that we are following the right procedures. We have a panel of four Islamic scholars who over-see the products. They offer guidance on Islamic law and audit the products”.

Another high street bank, HSBC, is developing a special range of Islamic products under the Amanah brand name. This range includes home finance plans, home insurance, commercial finance, and various current accounts and pensions. Hussam Sultan, the Amanah product manager says, “As a bank, we are not here to moralise or tell our customers that Amanah finance is the way to please Allah. We’re just here to provide them with a choice”.

The Islamic Bank of Britain has three branches in London, two in Birmingham and one each in Leicester and Manchester. They’re the only British bank specifically providing for Muslim customers and claim to be halal throughout their operations. All their financial products are approved by their Sharia’a Supervisory Committee – all Muslim scholars who are experts in all aspects of Islamic finance.

For your interest we show below, definitions of some words used widely in connection with Islamic finance.

A Glossary of selected Islamic words used in finance.

Amanah : Means trustworthiness, with associated aspects of faithfulness and honesty. As a central supplementary meaning, amanah also describes a business deal where one party keeps another’s funds or property in trust. This actually the most widely used and understood application of the term, having a long history of use in Islamic commercial law. It can also be used to describe different financial activities such as deposit taking, custody or goods on consignment.

Arbun : Means a down payment. It’s a non-refundable deposit paid to the seller by the buyer upon agreeing a sale contract together with an undertaking that the sale contract will be completed during a prearranged period.

Gharar : This means uncertainty. It’s one of three essential prohibitions in Islamic finance (the others being riba and maysir). Gharar is a sophisticated concept that encompasses certain types of uncertainty or contingency in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as speculation, derivatives and short selling contracts.

Islamic financial services / Islamic banking / Islamic finance : Means financial services that meet the specific requirements of Islamic law or Shariah. Whilst designed to meet specific Muslim religious requirements, Islamic banking is not restricted to Muslims. Both the customers and the service providers can be non-Muslim as well as Muslim.

Ijara : Means an Islamic leasing agreement. Ijarah permits the financial institution to earn a profit by charging leasing rentals instead of lending money and earning interest. The ijarah concept is extended to hire and purchase agreements by Ijarah wa iqtinah.

Maysir : Means gambling. It’s another of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition of maysir is often used as the basis for criticism of standard financial practices such as conventional insurance, speculation and derivative contracts.

Mudarabah : A Mudarabah is a form of Investment partnership. Here, capital is provided by the investor (the Rab ul Mal) to another party (the Mudarib) in order to undertake a business or investment activity. Profits are then shared according to pre-arranged proportions but any loss on the investment is born exclusively by the investor and the mudarib then loses the expected income share.

Mudarib : The mudarib is the investment manager or entrepreneur in a mudarabah (see above). It is this managers responsibility to invest the investor’s money in a project or portfolio in exchange for a share of the profits. A mudarabah is essentially similar to a diversified pool of assets held in a conventional Discretionary Managed Investment Portfolio.

Murabaha : means purchase and resale. As opposed to lending money, the capital provider purchases the required asset or product (for which a loan would otherwise have been taken out) from a third party. The asset is then resold at a higher price to the capital user. By paying this higher price by instalments, the capital user effectively gets credit without paying interest. (Also see tawarruq the opposite of murabaha.)

Musharaka : This means profit and loss sharing. It’s a partnership where the profits are shared in pre-arranged proportions and any losses are shared in proportion to each partners’ capital or investment. In Musharakah, all the partners to the commercial undertaking contribute funds and have the right, but without the obligation, to exercise executive powers in that undertaking. It’s a similar concept to a conventional partnership and the holding of voting stock in a limited company. Musharakah is regarded as the purest form of Islamic financing.

Riba : This means interest. The legal concept extends beyond interest, but in simple terms, riba covers any return of money on money. It does not matter whether the interest is floating or floating, simple or compounded, or what the rate is. Riba is strictly prohibited under Islamic law..

Shariah : This is the Islamic law as disclosed in the Quran and through the example of Prophet Muhammad (PBUH). A Shariah product must meet all the requirements of Islamic law. To facilitate this, a Shariah board is usually appointed. This board or committee is usually comprised of Islamic scholars available to the organisation for guidance and supervision for the development of Shariah compliant products.

Shariah adviser : Means an independent professional, usually a classically trained Islamic legal scholar, appointed to advise an Islamic financial organisation on the compliance of its products and services with Islamic law, the Shariah. While some organisations consult individual Shariah advisers, most establish a committee of Shariah advisers (often known as a Shariah committee or Shariah board).

Shariah compliant : Means the activity that ensures that the requirements of the Shariah, or Islamic law are observed. The term is often used in the Islamic banking industry as a synonym for “Islamic”- for example, Shariah compliant financing or Shariah compliant investment.

Sukuk : This has similar characteristics to a conventional bond. The difference is that that they are asset backed and a sukuk represents the proportionate beneficial ownership in the underlying asset. The asset is then leased to the client to yield the profit on the sukuk.

Takaful : This is Islamic insurance. Takaful plans are designed to avoid the characteristics of conventional insurance (i.e. interest and gambling) that are so problematical for Muslims. They structure the arrangement as a charitable collective pool of funds based on the comcept of mutual assistance.

Tawarruq : When used in personal finance, a customer with a cash requirement buys something on credit on a deferred payment basis. That customer then immediately resells the item for cash to a third party. The customer thereby obtains cash without taking an interest-based loan. Tawarruq is the opposite to murabahah.