Islamic Mortgages in the US: A Guide to Halal Home Financing

Islamic mortgages offer Muslims a way to buy homes while complying with Shariah guidelines. These financial products avoid interest (riba) by using different ownership and payment structures than traditional mortgages.

As of 2024, several companies in the US provide Islamic home financing. Each uses slightly different methods, primarily based on partnership and shared ownership models. While these options make halal homeownership possible, they also come with their own considerations and requirements that buyers should understand.

This guide explains how Islamic mortgages work in the US, compares major providers, and helps you understand what to look for when choosing a halal home financing option. We'll cover the basic structures, examine available choices, and address common questions about Shariah compliance.

Table of contents

1. What are Islamic mortgages?
2. Current Islamic mortgage options in the U.S.
3. Common criticisms and challenges of Islamic mortgages
4. Are there any benefits to getting an Islamic mortgage?
5. Alternative halal home financing options
6. Islamic scholars' perspectives
7. Conclusion
8. Frequently asked questions about Islamic mortgages

What are Islamic mortgages?

Islamic mortgages, also known as halal mortgages or Shariah-compliant home financing, are financial products designed to align with Islamic law, which prohibits the payment or receipt of interest (riba). Instead of traditional interest-based lending, these mortgages utilize alternative structures that emphasize shared ownership, risk-sharing, and asset-backed transactions.

Key principles of Islamic mortgages:

• Prohibition of riba (interest): Islam forbids charging or paying interest, viewing it as exploitative. Consequently, Islamic mortgages avoid interest-based transactions.
• Risk-sharing: Both the financier and the buyer share the risks and rewards associated with property ownership, fostering a more equitable relationship.
• Asset-backed financing: Transactions are tied to tangible assets, ensuring that financing is based on real economic activity rather than speculative practices.

Common structures of Islamic mortgages:

1. Musharaka (diminishing partnership): The most common structure in the US involves shared ownership between you and the financing company. You and the company buy the house together, with you gradually purchasing the company's share over time. While you're buying out their portion, you also pay rent for using their share of the property.
2. Ijara (lease-to-own): In this arrangement, the financing company buys the property and leases it to you. Your monthly payments include both rent and a contribution toward eventually owning the home. The ownership transfers to you once you've paid the agreed-upon amount.
3. Murabaha (cost-plus financing): The financing company buys the property and immediately sells it to you at a higher price, which you pay in installments. The markup is clearly stated upfront, and the sale price doesn't change over time.

According to AMJA (Assembly of Muslim Jurists of America), while none of these structures perfectly match classical Islamic contracts, some are permissible given the current reality of the US housing market. The key is that they avoid interest-based debt while providing a way for Muslims to own homes.

Current Islamic mortgage options in the U.S.

Several companies in the United States currently offer Shariah-compliant home financing solutions. Below is an overview of prominent providers:

Guidance Residential

One of the largest providers in the US, Guidance Residential utilizes the Declining Balance Co-ownership Program, based on the Musharaka (partnership) structure. In this model, the institution and the buyer co-own the property, with the buyer gradually acquiring the institution's share over time.

The company offers home purchase and refinance options, catering to both first-time homebuyers and those looking to refinance existing properties. Their widespread presence makes them accessible to a broad range of customers seeking Shariah-compliant financing.

While their contract structure is more developed than many alternatives, AMJA still categorizes them among providers to be used only in cases of dire need. Their contracts raise concerns about maintenance costs, taxes, and insurance distribution, though they do share ownership risks and don't charge prepayment penalties.

Devon Islamic

Devon Islamic offers Murabaha (cost-plus financing) structures. In this arrangement, Devon Islamic purchases the property and sells it to the buyer at a predetermined profit margin, with payments made over a fixed term.

Operating in multiple states since 2003, they provide home purchase, refinance, and commercial financing options. Devon Islamic Finance is a subsidiary of Devon Bank, which has been serving the Chicagoland community since 1945.

While they have been a longstanding provider in the market, AMJA's analysis has identified several significant Shariah compliance concerns with both of their contract types. The issues range from questions about property ownership transfer, inequitable distribution of insurance benefits and costs, problematic default terms, and the combining of sale and lease contracts in ways that conflict with established Islamic principles. Due to these concerns, AMJA has categorized Devon Bank's products as permissible only in cases of dire need, recommending Muslims seek other options when available.

University Islamic Financial (UIF)

UIF provides both Murabaha (cost-plus financing) and Ijara (lease-to-own) options. In the Murabaha model, UIF purchases the property and sells it to the buyer at an agreed-upon profit margin, with payments made over time. The Ijara model involves UIF purchasing the property and leasing it to the buyer, who eventually gains ownership.

UIF is a subsidiary of University Bank, a Michigan-based community bank. They offer home financing, refinancing, commercial property financing, construction financing, and auto financing, catering to a diverse set of financial needs.

While their products are certified by a Shariah board, AMJA indicates their contracts have similar concerns to Devon Bank's and should only be used in cases of dire need. Their presence in the market has been significant, particularly in the Midwest region.

American Finance House (Lariba)

Lariba employs Ijara (lease-to-own) and Musharaka (partnership) structures. In the Ijara model, Lariba purchases the property and leases it to the buyer, with lease payments contributing to ownership. The Musharaka model involves joint ownership, with the buyer gradually acquiring Lariba's share.

Lariba was established in 1991 and operates as the financing arm of the Bank of Whittier who claim to operate as a riba-free bank. They also offer a suite of financing options across home, commercial, business, and auto.

While Lariba was one of the pioneers in Islamic home financing in the US, AMJA's latest guidance indicates serious concerns about their contract structure. Their model has been particularly criticized for its similarity to conventional mortgages. However, in cases of dire need, some scholars permit their use based on their Shariah board's approval, though this is generally considered a last resort option.

Ijara Community Development Corporation (IjaraCDC)

IjaraCDC specializes in the Ijara (lease-to-own) model. In this structure, IjaraCDC creates a trust in which both the client and IjaraCDC hold an interest. The trust borrows funds to purchase the property, and the client then leases the property with the option to gradually gain full ownership.

IjaraCDC is based in the Midwest and has been active in the U.S. market since the early 2000s. They provide financing for both residential and commercial properties and also assist customers seeking to convert conventional mortgages to Shariah-compliant ones.

AMJA has expressed significant concerns regarding IjaraCDC's financing model. Specifically, they caution about the company's practice of requesting homebuyers to obtain standard bank loans which are then restructured. AMJA has ruled this model as impermissible as it contains explicit interest, advising against such arrangements and recommending these companies review and correct their approach.

Common criticisms and challenges of Islamic mortgages

The landscape of Islamic mortgages in the US faces several significant challenges that potential homebuyers should understand.

Similarity to conventional mortgages

A primary criticism is that some Islamic mortgage products closely resemble traditional mortgages, raising questions about their genuine adherence to Shariah principles. For instance, certain structures may involve profit rates that mirror interest rates, leading to perceptions that the distinction between Islamic and conventional financing is superficial. This resemblance can cause confusion among consumers regarding the authenticity of these products.

Higher costs

Another concern is the potential for higher costs associated with Islamic mortgages compared to conventional loans. This stems from their unique structure—while conventional banks can offer lower rates due to minimal risk in interest-based lending, Islamic financing involves genuine risk-sharing and partnership arrangements. As a result, the costs of Islamic mortgages can sometimes be slightly higher than their conventional counterparts. However, the difference in cost varies depending on the specific institution and product.

Structural issues

Risk-sharing arrangements may not always fully reflect true partnership principles in practice. Many contracts contain clauses that effectively shift most risks to the homebuyer, despite the theoretical framework of shared ownership. Additionally, the distribution of maintenance costs and taxes doesn't always align with ownership shares, creating potential Shariah compliance issues.

Complexity and transparency

The intricate structures of Islamic mortgages can result in complex contracts that are challenging for consumers to fully comprehend. This complexity may lead to misunderstandings about the terms and obligations involved. Critics argue that some financial institutions lack transparency in their product offerings, making it difficult for consumers to assess whether the financing truly complies with Islamic guidelines.

Are there any benefits to getting an Islamic mortgage?

The idea behind Islamic mortgages is to avoid interest by using alternative structures, such as profit-sharing or leasing, that technically differ from conventional loans. However, the reality is more nuanced. While the label of “profit” might be distinct from “interest” in a technical sense, the financial outcome — monthly payments based on a rate applied to the loan balance — can feel quite similar. For some, this technicality is enough to differentiate it from interest; for others, it can feel like a workaround rather than a truly interest-free solution.

The appeal of Islamic mortgages often lies in the process — the fact that these products are structured with an intention to comply with Shariah principles. For many, the journey and approach matter as much as the financial outcome. Islamic mortgages can offer peace of mind by aligning with ethical principles that emphasize transparency and shared risk. Even if the end result looks similar to a conventional mortgage, the methods used to arrive there can hold significant value for those who prioritize these principles.

Yet, some Muslims question if these models truly reflect the spirit of Shariah, given that they sometimes produce comparable costs and obligations as traditional loans. In the end, the real benefits of an Islamic mortgage come down to perspective. While these products may not completely revolutionize home financing, they represent an attempt to align modern financial needs with Islamic principles.

Alternative halal home financing options

Some alternative approaches to Islamic home financing have recently emerged to address the needs of Muslim homebuyers in the US.

Housing cooperatives

The cooperative model offers a unique approach to Islamic home financing. Ameen Housing, based in California, operates as a member-owned financial institution where members purchase shares and gradually build ownership. Their model has received approval from AMJA and operates completely interest-free through a community-based approach. The cooperative structure allows members to build equity while maintaining full Shariah compliance.

Shared equity model

A newer entrant to the market, Neeyah offers a distinctive shared equity approach that differs significantly from traditional Islamic mortgages. Their model involves true co-ownership, where they invest alongside homebuyers, covering up to 80% of the home's cost. Unlike conventional Islamic mortgage providers, Neeyah maintains ownership of their portion and doesn't sell to Fannie Mae or Freddie Mac. They share in all major expenses, including property taxes, insurance, and repairs, creating a genuine risk-sharing arrangement. Homeowners can increase their ownership share at their own pace or eventually achieve 100% ownership.

Islamic scholars' perspectives

AMJA has provided comprehensive guidance on Islamic home financing in the US, categorizing providers into three distinct groups based on their Shariah compliance levels.

Fully compliant

Providers like Ameen Housing operate with contracts that fully align with Shariah principles. They don't sell their contracts to government-sponsored enterprises, giving them more freedom to maintain Shariah compliance. However, their reach is limited, serving only tens of customers rather than the thousands needed.

Conditionally permissible

Providers like Guidance Residential and University Islamic Financial (UIF) fall into a category where scholars permit their use under conditions of need. While their contracts contain some issues requiring improvement, AMJA recognizes the reality of the US housing market and allows their use when necessary.

Not permissible

Providers such as Lariba and IjaraCDC have been deemed non-compliant by AMJA due to contracts that contain explicit interest or problematic structures. AMJA advises avoiding these providers as their models effectively mirror conventional mortgages.

AMJA emphasizes that the determination of need lies with individual buyers, considering factors such as:

• The availability of suitable rental options
• Local market conditions
• Family circumstances
• Financial capability

Conclusion

Islamic home financing in the US presents both opportunities and challenges for Muslim homebuyers. While traditional Islamic mortgage providers have made homeownership accessible to thousands of Muslim families, newer entrants are pushing the industry toward more authentic Shariah-compliant solutions.

The key to making the right choice lies in understanding your specific situation. Consider your level of need, local market conditions, and financial capacity. While some options may offer better Shariah compliance than others, AMJA's guidance provides flexibility based on individual circumstances, acknowledging that different solutions may be appropriate for different situations.

Remember that what works best for one person may not be ideal for another. Take time to research all available options and consult with your local scholars.

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Frequently asked questions about Islamic mortgages