Can Muslims get a mortgage?
Is a mortgage allowed in Islam?
Islamic scholars generally agree that it is not permissible for Muslims to buy a home using a traditional mortgage loan. That is because at the heart of a traditional mortgage is riba, the practice of lending and borrowing money at interest.
Some scholars say a mortgage may be permitted under extenuating circumstances, where buying a home is considered a need and no alternative to a mortgage exists. However, Islamic alternatives to a mortgage now exist in the West. And where reasonable alternatives exist, the exception would not apply.
For faith-conscious Muslims, Islamic home financing is clearly the way to go when buying a house.
Muslims can get an alternative mortgage if it’s shariah-compliant.
Shariah-compliant alternatives to a mortgage do exist, and they are now not only accessible in America but competitively priced as well.
How can you ensure that your home financing is shariah compliant?
- First, choose a home financier that solely provides Islamic home financing. It’s best to avoid choosing a bank that provides so-called Islamic mortgages on the side while engaging in many activities that are not halal. Read more about why below.
- Then, check that the financier’s services are riba-free. The entire foundation of the financing should be structured on sound Islamic approaches. The most common options in the West are a lease-to-own arrangement, known as ijarah, or a co-ownership arrangement, known as musharakah, in which the customer and financier buy the house together as partners.
- And finally, ensure that the financier is approved by a reputable board of Islamic scholars.
Be aware that some of the terminology used in the material on Islamic home financing may resemble that used in traditional mortgages, such as the term “rates.” That does not mean that it’s not halal. Islamic home financing must comply with government regulations, and it may be structured in a way that makes it easy for customers to compare with traditional options. What you are checking is the underlying structure and foundation.
As a quick analogy: Two bags of potato chips might look similar, but once you look at the ingredients, you may find that one is made with lard and is not halal, while the other is made with vegetable oil and is halal for you to enjoy. Check the ingredients of your home financing. They should be clearly explained on the company’s website.
Conventional home loans are not permissible in Islam
It’s important to understand that the entire system underlying conventional home loans is haram, as well as the loan itself. A loan in Islam is intended to be a charitable arrangement—a way to help another person without seeking gain or profit. Riba, or interest, is not permitted, and the foundation of a conventional mortgage loan rests on the use of interest.
Looking deeper, under Islamic financing principles, one of the most important principles in Islamic finance is that it is asset-backed finance. A person can only buy or sell an asset that has intrinsic value. Money has no intrinsic value; it is only a medium of exchange. In a conventional loan, the customer is actually buying the use of money. It’s like agreeing to buy $20 for $30. This is not an acceptable financial contract in Islam. This prohibition protects the market’s stability and protects against manipulation.
Islamic financing protects individuals from exploitation and harm and fosters equity and justice. A borrower-lender relationship is inherently unequal in power. This places customers at risk of exploitation since they have no choice but to agree to the lender’s terms, with only government regulations—which vary from state to state and can change at any time—to protect them.
Finally, money in Islam must be gained in a halal manner. Banks that provide so-called Islamic mortgages in additional to conventional mortgages have earned the money they provide their customers through the use of interest, as well as through investing in and engaging in a range of other activities that are not permitted in Islam. This renders the use of that money problematic for Muslim consumers.
With so many ways that a traditional mortgage runs counter to Islamic financial practices, it’s good that alternatives now exist for faith-conscious Muslims in America.
Watch out: Not all Islamic home financing options are Shariah compliant
When you make the intention to choose Islamic home financing, you have made an important first step. Now, you will want to follow up and ensure that the service or product you’re choosing is actually Shariah-compliant. The authenticity of the product is essential.
Here are some important questions to keep in mind as you consider different Islamic financiers:
- Is the financier an Islamic organization that understands the nuances of Islamic law and shariah-based financial principles?
- Was the company’s home financing product developed under the oversight of Islamic scholars?
- Is the company audited on a regular basis by experts in Islamic finance to ensure that their practices remain halal?
This information should be clearly stated and supported on the company’s website. A few minutes of research are all it should take to check the company’s history and the authenticity of its product.
Explore Muslim home financing options:
Fortunately, choosing Islamic home financing does not mean a customer is limited in terms of available choices and options. On the contrary, Islamic home financing is now available in an array of options. A customer can choose their contract length, the percent of the home’s price they will pay as a down payment, and even whether their rate is fixed or adjustable. They can finance any type of home, from a condo to a single-family home, and even a second or vacation home. Explore Guidance Residential’s available options here.
We wish you the best on your home-buying journey!
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Rates have dropped to historic lows! Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today!