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Financing a House through Mortgage

Answered according to Hanafi Fiqh by ShariahBoard.org

Assalamualaikum Warahmatullah Mufti Sahib

May Allah Subhanahu Wa Ta‘ala give you the best of health ameen.

I live in New Jersey and currently rent an apartment. Is it permissible to buy a home through mortgage? If yes can I take mortgage from any bank in America? Are there any banks which provide true Islamic Financing?

JazakAllah Khair

الجواب وباللہ التوفیق

Assalamualaikum Warahmatullah

 

Buying or selling through any transaction involving interest is absolutely impermissible, whether it is taking an interest based loan or buying a house etc. However buying a house by taking an interest free loan is considered permissible. Usually all banks are involved in interest based loans.

 

As per our knowledge, Devon Bank (located in Chicago) is providing an opportunity of such an interest free loan according to the guidance provided to them by the ulamah kiram of Shariah Board of America.

 

Considering the common need of a house and considering the challenges involved in buying these houses in this era, the ulamah kiram, to mitigate these challenges, have provided details of the halal options to buy houses as a replacement of the interest based loan market (as described in later section of this answer). It is only permissible to take such loans from the banks which strictly follow the options or methods prescribed by the ulamah.

 

The first option is such that a company, financial institution or bank buys a house and takes its complete possession, then sells it to the buyer with a profit on an loan installment basis. The company will charge the buyer the total amount of each installment for the total number of installments based on the contract. In this option, it is permissible to do this transaction with or without a percentage of profit. The details of the profit are such that at the time of agreeing upon the contract, the company can state that they are going to charge x amount of profit after charging the total cost of the house along with any expenses the company had to incur. This is the detail of the situation where the buyer is not capable of sharing any of the cost for buying the property in coordination with the company.

 

This ruling will apply as-is in the condition where the buyer is capable of sharing a fraction of the cost of buying the house and taking a loan from the company for the remaining cost. In this situation however the buyer and the company will be considered proportionate owners based on the amount of money they shared at the time of buying the house. The company will then sell its share to the buyer on an installment basis with a profit on the original amount of the transaction. In this situation, the buyer is only liable to return this amount decided as part of the contract and the company cannot charge any additional money in case of missed or late payment of the installment.

 

The second option is such that the company and the buyer buys a house together in partnership and each party’s ownership will be equivalent to the share they paid at the time of buying the house. Then the company will give their share of the house to the buyer on rent on an annual or monthly rental basis. Then the company’s total share in the house will be divided into a fixed number of shares e.g. ten shares total. Then the company and the buyer will agree upon a period or length of time in which the buyer will be able to pay off the company for one share and become owner of that additional share. For example if the total share of the company is equal to 200,000 dollars, every share will become one tenth i.e. 20,000 dollars. The buyer will pay this amount off in say 6 months and become owner of 1 of the 10 shares (which currently the company owns). The buyer’s shares will increase proportionally to the amount of payments he continues to make similarly the company’s ownership or number of shares will decrease accordingly. Since the buyer is currently renting the shares that the company owns and is subsequently buying those shares, the more he buys the shares the less his rent payment will become. For example, when the total number of shares owned by the company were 10 and the monthly rent was 1000 dollars, upon buying 1 share, the rent will be decreased to 900 a month, upon buying 2 shares, the rent will be decreased to 800 and so on. Once the buyer has bought all of the company’s shares, the whole house will become the buyer’s property and in that way the partnership and rental nature of the contract will become mature and no more applicable.

 

This is keeping in mind that the above condition is based on the following three contractual fundamentals:

  1. A contract between the parties regarding the partnership or respective ownership
  2. The buyer renting the company’s shares
  3. The company selling each of its shares to the buyer

Another important key point to remember is that the above mentioned aspects should not be laid down in one single agreement rather for each aspect a continuous separate agreement at its specified time shall be made and agreed upon between the buyer and the company. If all of the above mentioned aspects are documented as part of the same contract then according to the Islamic Shari’ah this will become an impermissible transaction. It is however permissible for the buyer and the company to agree that they will perform separate contracts for each of the three aspects at their specified timing one after the other, but these contracts shall not be binding upon the actual contract for loan options described above (option 1 and 2).

فقط واللہ اعلم بالصواب

 

This answer was collected from Shariahboard.org. It was established under the supervision of the eminent faqih of our era, Hazrat Shah Mufti Mohammed Navalur Rahman damat barakatuhum.

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