Are Guidance Residential ‘Islamic Home Mortgage Loans’ Really Halal?

Letter block in word halal on wooden blocks.

We hear this question often: Is Guidance Residential’s Islamic home financing really halal? The answer is a simple and resounding YES

Guidance Residential’s model of Islamic home financing was created with the help of top scholars to fill the need for Islamic home financing in America, and our model remains approved by independent scholars today. 

The question as worded in the title is misleading, because our home financing isn’t a “mortgage loan” at all. There are some external similarities between Islamic home financing and a mortgage loan, but in reality they are based on completely different foundations. Our Islamic finance offerings are riba-free and accepted by independent Islamic scholars as completely halal. 

Are Mortgage Loans Permissible in Islam?

Before we go further, let’s address the question of whether mortgage loans are allowed in Islam.

Scholars of Islamic finance are in agreement that traditional mortgages involving the payment of interest is not an acceptable method to buy a home. Some scholars have stated that extenuating circumstances may make a conventional mortgage loan permissible if there is no other option. Now, however, there are other options.

It is now possible for home buyers to avoid using an interest-bearing conventional mortgage loan when buying a home in the United States. This means it is clear that a Shariah-compliant approach is preferable — if not the only permissible option under principles.

3 Steps Guidance Residential Has Taken to Ensure Our Islamic Home Financing Is Halal

Step 1: Founded on Faith—and Meticulous Research

Guidance Residential’s purpose for existing is to provide a halal alternative to a conventional mortgage loan for faith-conscious American families.

To that end, before ever opening for business, Guidance Residential spent three years researching and building a Shariah-compliant co ownership program of home financing that would work within the confines of American society.

Guidance worked with six world-renowned Muslim scholars of to create a Declining Balance Model of Co-Ownership based on the Islamic principle of Musharakah Mutanaqisaor“Diminishing Partnership.”

How It Works

Conventional mortgages are based upon lending of money — essentially selling money now for more money later. In return for borrowing the money, the borrower pays the lender riba, or interest, which Islam forbids.

Guidance Residential’s model of riba free halal financing, on the other hand, is not a loan. It establishes a co ownership agreement with each home buyer, in full compliance with Islamic law.

Our co ownership model of home financing is a partnership in which we buy a home together with the customer. The home buyer does not pay interest, because it isn’t a loan.

After purchasing the home with Guidance and paying a down payment, the home buyer then gradually buys Guidance’s co ownership stake in the property.

The home owner’s monthly payments consist of two parts. As the sole partner who is actually using the home each day, the home buyer pays Guidance Residential a fee each month for using our portion of the property (a profit payment), while also buying out our share over time (an acquisition payment). This arrangement is completely acceptable under Shariah guidelines.

The co owners enjoy a much more equitable relationship than the lender-borrower relationship of a traditional mortgage. Home buyers maintain full home ownership rights from the beginning, plus some additional benefits over many conventional mortgage loans, such as risk sharing, capped late payment fees and zero prepayment penalty.

This provides a sharia compliant path to home ownership for American Muslims as well as other home buyers who prefer a more just and equitable alternative to a traditional mortgage.

>> Related Read – The Purpose of an LLC in Islamic Home Financing

Authenticity Guaranteed

Unparalleled in its expertise, our independent Shariah Supervisory Board comprises some of the world’s leading scholars of Islamic financial transaction law. These renowned experts were actively engaged in the design of our home financing program, and they remain involved in its ongoing oversight to ensure that it remains sharia compliant.

This extensive development process ensured that the resulting model was carefully and firmly planted in Shariah law and in ethical, equitable, and permissible financial practices.

>> Fatwas on the permissibility of our services are available for view.

Similar on the Surface Only

Any financing in the United States must follow federal, state, and local rules and regulations. On top of that, home buyers need to be able to compare our product with other companies’ mortgages.

For these reasons, our product is structured in a way that looks familiar to those who are familiar with a mortgage, and our pricing is competitive with conventional loans as well.

However, comparing a loan with Islamic financing is like looking at similar icing on top of two very different cakes. Our cake is halal.

>> Related Read – The Difference Between an Islamic Mortgage and a Conventional Mortgage

Step 2: Focusing on Riba-Free Home Financing

It’s important to note that Guidance Residential is not a bank. After taking the lead as the pioneering company offering Islamic home financing in America, that service still remains our sole focus.

It is now possible to find large banks that have begun to offer “Islamic home loans” on this side. At the same time, they are still a traditional bank dealing with a multitude of other non-halal services and practices that are not compatible with Islamic finance.

Guidance Residential, on the other hand, has remained true to our authentic purpose and our principles. 

Here is what we do each day: We buy homes together with individuals and families through a riba free co ownership model of financing.

That’s all we do — provide a halal way for community members to buy a home of their own.

We are not a bank, and therefore we do not participate in any riba-based activities. All of our work is rooted in Islamic principles.

Each year, our focus is solely on expanding our service area throughout the United States and making our customers’ home-buying journey even better. 

>> Related Read – Non-Bank Mortgage Financiers & Servicers: What to Know

Step 3: Audits By an Independent Board of Scholars

Guidance Residential takes an additional step to ensure transparency and scrupulous compliance: We undergo annual audits by our independent Shariah Supervisory Board.

Our independent Shariah Board comprises seven scholars, headed by Justice Muhammad Taqi Usmani, who is also the chairman of the Shariah Board for the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

The board appoints an auditor with specialized knowledge in Shariah as well as finance to examine Guidance Residential and report back on the extent of our compliance with Shariah principles. The audit ensures that a company is compliant with best practices and can detect early signs of possible noncompliance. 

>> Related Read – What Is An Islamic Mortgage? How Does It Work?

The audit verifies the following:

  • A Shariah-compliant structure is in place
  • Shariah policies are updated and implemented 
  • Employees’ appraisals show that they have complied with guidelines
  • All products offered to consumers have been approved by the Shariah Supervisory Board and that a fatwa has been obtained

It also verifies that any income from non-compliant sources have been allocated to charity, and it reviews transactions for errors and opportunities for improvement.

This audit, conducted according to international AAOIFI standards, provides transparency for government regulators, investors, and consumers.

The Result

This strong and secure foundation and meticulous adherence to Shariah principles from Day 1 is what sets Guidance Residential’s program apart from others. A pioneer in Islamic home finance, Guidance Residential ensures that our customers can trust that the biggest purchase of their lives is conducted in accordance with their faith. And we renew that commitment with every passing year.

Get Started Now

Looking to refinance or purchase? Have a friend or family member who is looking for a home? >> Call 1.866.Guidance, find an account executive in your state or start an application online today!

>> Related Read – Do You Have to Be Muslim to Get a Riba (Interest) Free Mortgage?

Originally published November 2020, updated December 2023.