5 Misconceptions about Islamic Finance
As interest in Islamic finance in the USA continues to grow, so too does the need for clarity around how it works — especially when it comes to halal finance options like home ownership. However, many consumers still hold onto tightly held misconceptions surrounding Islamic finance.
Whether it’s because of an unclear understanding of the financing industry in general or because of misinformation surrounding Islamic mortgage alternatives, potential homebuyers often bypass potential savings. These misconceptions can make it difficult to honestly assess the financing options available to you.
This blog will review Islamic finance myths and how to get started with the financing process.
Understanding Common Misconceptions About Halal Finance
Many Americans (both Muslim and non-Muslim) still hold outdated or incorrect assumptions about Islamic finance and the laws that govern it. Whether you’re new to the concept or simply looking for trustworthy information, debunking these myths is essential for making informed decisions rooted in both your values and your financial goals.
These are the five most common misconceptions about Islamic home financing.
Myth #1: An Islamic mortgage is just riba (interest) under a different name.
Fact: It’s a completely different structure.
Instead of a lender-borrower arrangement, Guidance Residential and the customer are co-owners of a property through a partnership approach. For each home purchased, Guidance sets up an LLC, and the financier and customer buy the home together.
Then, the home buyer makes a monthly payment each month that includes two parts: One part goes toward buying more of Guidance’s share of the property, and the other part is a fee for using Guidance Residential’s share of the property. These are not loan repayments with interest, but rather, payments towards full ownership.
Asset-backed financing is at the heart of halal mortgages.
In a loan, the borrower is essentially buying money from the financing company now in return for more money later in the form of interest. Money is not considered a tangible asset, so no tangible asset is involved in this type of transaction.
On the other hand, in its halal musharaka-based co-ownership model of financing, Guidance Residential purchases the property as a tangible asset along with the home buyer as co-owners. This structure ensures that every transaction is tied to a real economic activity, which is a fundamental requirement of Islamic finance.
Guidance’s program was developed with the help of six top scholars of Islamic finance, and the program continues to be overseen by an independent shariah board consisting of seven highly respected scholars of Islamic finance.
Externally, Guidance Residential’s halal mortgage may look similar to a conventional mortgage loan. Home buyers in the U.S. naturally expect that their monthly payments will be competitive with what they would pay for a conventional loan, so Guidance Residential aligns its rates with prevailing interest rates. The external similarities make it easier for home buyers to compare their options and for regulators to oversee it. Scholars have deemed these similar rates acceptable under Islamic financial principles. And this outward resemblance does not turn the monthly payments into a repayment of a loan with interest.
As an analogy, consider the following simple example: Halal potato chips may be offered at the same price as a famous brand of potato chips that contain lard. The pricing of the potato chips, though the same, does not alter the nature of the product.
Myth #2: Islamic finance is for Muslims only.
Fact: Islamic home finance is a mortgage alternative that is available to anyone.
Maybe you’ve heard that Islamic ethical finance solutions are only for Muslims or those following shariah law. This is one of the most common misconceptions. The truth is that a riba-free mortgage is available to homebuyers of any faith who are interested in this more equitable option.
While a halal mortgage is based upon an ethical framework rooted in the Islamic faith, it shares the same economic objectives as a conventional mortgage. Islamic financing is available to Muslims and non-Muslims alike, and it is gaining popularity. Several major banking groups have even begun to offer Islamic financial products and services, although a company founded on Islamic principles can offer a more authentic product.
Authentic Islamic finance focuses on ethical and social values that build in unique advantages that appeal to consumers of other faiths in the USA .
Co-ownership is a more equitable arrangement than a conventional mortgage loan right from its very foundation: It is a partnership between the financier and home buyer rather than the debtor-lender arrangement of a mortgage. Guidance Residential’s co-ownership model also shares some of the risks of homeownership with the home buyer, as well as capping or eliminating some fees that have been historically common with traditional mortgages.
Based on its merits alone, aside from the religious element, this approach is gaining appeal. The market is truly open to everyone.
Myth #3: Islamic finance is drastically different from a conventional mortgage.
Fact: Islamic finance is built on a different foundation, but the process will feel similar to the homebuyer.
Are you concerned that Islamic finance in the USA is not going to work with existing lenders and credit structures? Halal finance is really just a different approach to conventional finance. As required by Islamic law, the terms are asset-based (not currency-based), and there is no interest (riba).
The rate of return is based on the actual asset or investment and not interest on the money loaned because interest is not compliant with Islamic principles. The financier, however, may make a profit or return on its investment.
Scholars have confirmed that it is acceptable for an Islamic financier to structure its products in a way that resembles more conventional methods on the surface, even though the foundation is completely different. This facilitates regulation by government bodies and makes it easy for customers to compare their options.
Myth #4: Islamic finance is more complicated than traditional mortgages
Fact: The process is no more complicated than a conventional loan.
Home financing, in general, can seem complicated to the average consumer — especially to first-time homebuyers or property owners. However, working with a company that provides support and guidance throughout the process of financing or refinancing a home is a simple solution. Islamic finance isn’t more complicated or difficult than getting a conventional mortgage when you work with the right partner.
Guidance Residential, the #1 U.S. Islamic home finance provider, assigns a professional Account Executive to each client. The Account Executive works with each client to answer questions and provide education on all aspects of the financing process, including the differences and similarities between Islamic and conventional finance. Our Account Executives are skilled and knowledgeable and understand that clients, especially those purchasing their first home, need a trusted source for one of the largest financial decisions they will make.
We also offer convenient online tools such as for those who prefer to find quick answers on their own. These tools range from calculators that can provide instant estimates, to the entire application process, which can be fast-tracked online.
Whether online, on the phone, or face to face, Guidance Residential prides itself on customer service. It’s the Guidance Difference.
Myth #5: Islamic finance is more expensive than conventional finance.
Fact: Not anymore.
You might be concerned that you’ll be paying more upfront because it’s a specialized kind of financial service for Muslims. But Islamic home finance solutions have come a long way and are much easier to source.
Decades ago — when Islamic home finance was first becoming established — pricing did tend to be higher. However, as the industry grew, the cost of Islamic home finance fell in line with conventional mortgages.
Today, Islamic home finance rates are competitive, making halal financing a viable alternative to mortgage loans.
Signs You’re Ready to Apply for Islamic Finance
How do you know when it’s time to apply for financing? Whether you’re a first-time homebuyer or considering a refinance, applying for Islamic finance may feel like a big step.
Here are a few signs you’re ready to start the pre-approval process:
You understand how Islamic finance works. You’ve done your research and you prefer the equitable principles behind halal home financing, including the prohibition of riba, the use of asset-backed contracts, and the partnership model used by providers like Guidance Residential.
You’ve reviewed your financial profile. You are ready to provide basic documentation so a financier can check your income sources, debt-to-income ratio, and credit standing.
You’re clear on your homeownership goals. You have a sense of what kind of property you’re looking for, your budget, and how long you plan to stay in the home.
You’re aligned with the values behind Islamic finance. Whether for faith-based reasons or ethical ones, you value transparency, fairness, and shared risk — the principles at the heart of halal finance.
Before applying, you might also want to review our home financing application checklist.
Now’s the Time To Make Your Move!
Guidance Residential’s co-ownership model of Islamic home financing remains the #1 U.S. Islamic home financing provider, with more than 40,000 families assisted over more than 20 years.
Learn more about Islamic finance, or get started on your homeowner’s journey today!
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today.
Originally published in April 2024, last updated in October 2025.
