10 Common Guidance Residential Islamic Home Financing Questions

Adam and Sarah are new home buyers that plan to purchase a home this year. They are also devout Muslims who wish to finance their home in a way that upholds the principles of their faith. As American Muslims, Adam and Sarah want to fulfill their American Dream. A critical factor? Home ownership. However, they wonder if that is possible without violating the principles of their faith forbidding them from giving or receiving interest, otherwise known to Muslims as Riba or Usury.

In searching for a solution, Adam’s friend mentioned Islamic Home Financing or Shariah-Compliant Home Financing and that as American Muslims, it IS possible to own their home in a strictly halal way without violating the laws of their faith.

There are many American Muslim families like Adam and Sarah who have similar questions. In order to provide a better understanding of the process, here are the ten most commonly asked questions about Islamic Home Financing from potential home buyers.  Information is also shared regarding Guidance Residential’s Declining Balance Co-ownership Program – a program approved by leading Shariah scholars of the world and endorsed as a permissible way to home ownership for American Muslims.

  1. What is Shariah Home Financing?

Shariah-compliant home financing is a form of financing a home in a way that does not violate the principles of Islamic law related to financial contracts set by the rules and injunctions from the Quran and Sunnah.  Among the prohibitions are Riba (usury / interest), Gharar (speculation or contractual uncertainty), and Maysir (gambling) among others. When financing a home using a conventional mortgage, payment of interest (Riba) is required, which is prohibited in Islam and all monotheistic and even some non-monotheistic faiths. Guidance Residential’s Shariah-compliant home financing program does not involve Riba. The Declining Balance Co-ownership model of Guidance Residential is a participatory financing program, which is based on an equity partnership between Guidance and the customer. The unique differentiating factors between  Guidance Residential’s program and a conventional mortgage are:

Co-ownership

Guidance Residential and the home buyer each own a percentage of the property as co-owners. Home buyers increase their share over a period of time through a monthly payment that results in a corresponding decrease in Guidance’s share.

Risk sharing

Guidance Residential shares the risk with the home buyer in certain instances of loss, including natural disasters, condemnation or eminent domain.

Riba-free

The Declining Balance Co-ownership Program, does not involve payment of interest between a debtor and creditor – it is 100% Riba-free.

No pre-payment penalty

There is no pre-payment penalty required by Guidance Residential when a home buyer wants to pay ahead of the agreed schedule.

Capped late payment fees

In case of late payments, Guidance Residential charges only a capped fee equaling $50 or less, exclusively meant to cover the expenses involved in administering a late payment, rather than the common market 5% penalty.

Non-recourse commitment

In the event of payment default, Guidance Residential does not pursue the home buyer’s personal assets.

  1. How does the Declining Balance Co-Ownership Program Work?

Guidance Residential partners with the home buyer in a co-ownership venture and each party owns a percentage of the home in proportion to the equity they contribute. Home buyers are required to make monthly payments to Guidance Residential over a predetermined period of time in order to completely buy out Guidance Residential’s shares in the property thereby solely owning the property.  The monthly payment consists of two portions; (1) an amount for the acquisition of a portion of Guidance Residential’s ownership interest (Acquisition Payment) and (2) an amount for the exclusive use of the entire property (Profit Payment). The Acquisition Payment serves to purchase Guidance Residential’s shares of ownership over the predetermined period of time.  The Profit Payment serves to allow the home buyer to use the part of the property owned by Guidance.

For example: If a client wishes to purchase a $300,000 home and has $30,000 for a down payment, Guidance will contribute the remaining $270,000 in funds to purchase the home together forming a co-ownership arrangement.  The co-ownership agreement is set up on a 15, 20, or 30-year contract in which monthly payments are made to Guidance Residential. In accordance with the terms of the co-ownership agreement, the home buyer can sell the property at any time and any profit from that sale will belong to the home buyers.

  1. What is the role of Freddie Mac in the program?

Freddie Mac is a federally mandated institution chartered by Congress in 1970, to provide funds for home financing companies in order to promote and advance the American dream of home ownership.

For properties financed by Guidance Residential’s Co-ownership Program, Guidance uses its funds along with the home buyer’s funds to purchase a property then sells its co-ownership stake to Freddie Mac, who then becomes an investor. This collaborative effort, with all terms agreed upon in the co-ownership agreement remaining unchanged throughout the duration of the contract, is approved by the Shariah Supervisory Board.

Guidance Residential worked with Freddie Mac and 18 law firms for 3 years to create a unique legal structure that does not involve the sale of debt and is compliant with Islamic legal jurisprudence.  Guidance is the only organization in the U.S. allowed to deliver the Declining Balance Co-ownership structure to Freddie Mac.

  1. How is the Declining Co-Ownership Program different from conventional mortgage loans?

In order to be an acceptable method for commerce according to Islam, a home financing program must be modeled after the Islamic financing concept known as ‘Musharakah Mutanaqisa’ or ‘Diminishing Partnership’. The relationship between Guidance Residential and the home buyer is that of co-owners in a property and not that of a borrower-lender. The initial financing provided by Guidance Residential is applied to acquire an interest in the property and not to provide a loan.

  1. What makes Guidance’s program halal?

Guidance Residential is unique in that it utilizes a globally renowned board comprised of seven of the leading scholars in the world of Islamic Finance to ensure that its initiatives are Shariah- compliant and complaint within each individual states’ home protection laws.

  1. Is Islamic finance for Muslims only?

No. The Islamic home financing program at Guidance Residential welcomes people from any community and faith to take advantage of this ethical and responsible way of home ownership which not only fulfils the obligation of all monotheistic faiths, but also benefits the economy with a just way of financial transaction based on real assets.

  1. Can a home be purchased with less than 20% down payment?

Yes. Guidance Residential customers can make a down payment as little as 5% for primary homes and 15% for investment properties.

  1. Is it really interest that you’ve renamed as “”?

No. Interest is charged on a loan, and profit is charged for a tangible good or service. At Guidance Residential the contract is not a loan contract, but an equity partnership contract related to a tangible asset – the home.

  1. Why do Islamic financial institutions need credit scores?

In the early days of Islam, investors would inquire about a potential partner’s history of doing business before entering in a contract in order to determine whether the partner was able to fulfill the trust (amanah) of the financial transaction (in modern jargon, financial industry calls it ‘credit worthiness’). In current business practice, a credit score serves as a standardized method of determining that worthiness.

10. Is Islamic financing more expensive than conventional mortgages?

Guidance Residential’s objective is not just to offer Shariah-compliant home financing, but also to provide it at a competitive price.  Guidance’s website provides the consumer with a weekly comparison of their rates with the rates of four conventional mortgage institutions.

Click here to compare rates

Click here for more Frequently Asked Questions.

Click here for Online Pre-qualification. It takes less than 10 minutes.