Interest-Free Home Financing Made Possible
For many working Muslim Americans, homeownership is more than just the fulfillment of the American dream. It is a major financial investment that must resonate with their faith. This can present a challenge when it comes to choosing a home financing provider. Interest, or riba, is strictly prohibited in Islam, and conventional mortgages are based on borrowing money at interest. It’s a dilemma for the Muslim-American home buyer.
Are interest-free mortgages possible?
The good news is that yes, it’s possible, and an authentic and competitive alternative is now widely available!
Interest-Free Mortgages
Observant Muslims who wanted to avoid paying interest once found themselves, in most cases, faced with the choice of trying to justify an interest-based mortgage or paying rent forever.
Thankfully, this is no longer the case.
Islamic mortgages are now available. It’s important to note that they do not involve a mortgage loan, and the home buyer does not borrow money or pay interest.
A conventional mortgage loan cannot be Islamic, because it is based on interest (riba), which is prohibited in Islam like it is in all monotheistic, and even some non-monotheistic, faiths.
However, an alternative to a mortgage is now available. Guidance Residential offers an authentic form of Islamic home financing that is not a loan and it does not involve paying interest. It is a co-ownership program.
Thankfully, these days, Islamic home financing is entirely possible.
How Interest-Free Home Financing Works
Interest-free home financing via Guidance Residential’s Declining Balance Co-Ownership Program is based on a partnership between Guidance and the customer.
In this model of Islamic finance, Guidance and the homeowner buy the home together as co-owners. Each party owns a percentage of the home in proportion to the equity contributed.
Homebuyers make monthly payments to Guidance Residential over a predetermined period of time to completely buy out Guidance Residential’s shares in the property and become the sole owner. At the same time, they pay Guidance a fee for using the company’s share of the home they purchased together.
These fees are competitive with a traditional home mortgage for the sake of simplicity. But the fees paid by Guidance’s customers are entirely different from riba.
The monthly payment consists of two portions:
1. Acquisition payment: One part of the monthly payment is allocated for the acquisition of a portion of Guidance Residential’s ownership share. This is called the Acquisition Payment. The Acquisition Payment serves to purchase Guidance Residential’s shares of ownership over the predetermined period of time.
2. Profit payment: The other part allows the customer to retain the exclusive use of the entire property. 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 can afford an initial investment of $30,000, Guidance will contribute the remaining $270,000 in funds to purchase the home together, forming a co-ownership arrangement.
While the home buyer initially owns a 10% share in the home, they have full use and ownership rights under the law, right from the beginning.
The co-ownership agreement is set up on a 15, 20, or 30-year contract in which monthly payments are made to Guidance Residential. Over that period of time, the homeowner’s share increases and Guidance’s share decreases.
In accordance with the terms of the co-ownership agreement, the home buyer can sell the property at any time, and any profits from that sale will belong to them alone.
Why Guidance Residential Is the #1 U.S. Islamic Home Financing Provider
A company in this space must not only adhere to Islamic financial principles but also apply it in the modern mortgage market. The answer is a shariah-compliant home financing company — Guidance Residential.
When Guidance Residential opened its doors, it quickly became the country’s leading provider of Islamic home financing for the following reasons.
- Authentic model of Islamic finance: Not only is Guidance’s model of home finance riba-free and based soundly on authentic Islamic principles, the company is purely focused on shariah-compliant products and services. Unlike many banks that provide “interest-free financing” on the side (while earning large amounts of money from offering credit and personal loans at interest), Guidance is neither a subsidiary nor an operator of a riba-based banking institution.
- Independent shariah board: A panel of renowned experts in Islamic finance ensures the continued shariah compliance.
- AMJA endorsement of Guidance’s Declining Balance Co-Ownership Program
- Millions donated for community initiatives
- Comparable cost to a conventional mortgage loan
- Additional benefits for the home buyer afforded under Islamic financial principles, such as risk sharing
After three years of development, a multi-million dollar research and development budget, and discussions with 18 law firms, Guidance Financial Group (parent company of Guidance Residential and in turn a subsidiary of Capital Guidance) unveiled the Declining Balance Co-Ownership Program that provides a fully riba-free home financing option.
‘Islamic Mortgages’ From Banks Are Not Islamic
Some banks have now begun to offer mortgages with Islamic-sounding names. They may advertise that they offer interest free loans or zero interest loans, but at their foundation, these products are not based on the principles of Islamic finance. In addition, banks earn their income largely from interest — money that they then offer to Muslims as so-called Islamic mortgages.
If a home buyer is looking for an Islamic mortgage, it’s important to check whether the source is a bank or a truly authentic and independent Islamic financier.
Guidance Residential Today
As the #1 U.S. Islamic home financing provider, Guidance has now financed over $10 billion to Muslim-American homeowners, serving more than 40,000 families.
Guidance retains the most authoritative Islamic supervisory board in America. The board comprises world-renowned scholars, many of whom currently serve or have served on the board of the industry’s leading standard-setting body, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The Chairman of AAOIFI’s shariah board, Justice Muhammad Taqi Usmani, is the long-time Chairman of Guidance’s independent board.
More recently, the Assembly of Muslim Jurists of America (AMJA), an advisory group to the Muslim-American public with experts in Islamic jurisprudence, issued a statement of support of Guidance and its program.
After a review of all Islamic home financing programs that claim to be shariah-compliant, AMJA named Guidance Residential and its Declining Balance Co-Ownership Program as a permissible path to Muslim-Americans in need of home financing.
Since 2002, Guidance has supported many community-based organizations and has quickly become a major corporate sponsor of Muslim-American community initiatives. Guidance has committed millions of dollars for such initiatives.
Guidance Residential has become the #1 U.S. Islamic home financing provider through the dedication of its team, an eye for a quality finance product, and careful adherence to authentic Islamic principles.
A famous teaching by Bukhari states, “A person’s happiness includes a big house, a good neighbor, and a steady mount.” We can all agree that if you add a sound financial partner to the mix, the sky is the limit.
Learn More About Interest-Free Home Financing
- Read Fact or Myth? Islamic Finance Is More Expensive Than Conventional Home Loans
- Watch Islamic Home Financing: Is It Really Different?
- Contact Guidance Residential Today
Continue Your Homeownership Journey
Buying a home is one of the most important decisions you will make. The team at Guidance Residential is here for you, from the first step of pre-qualification or pre-approval, on through to finding the right real estate professional for you and your family — or refinancing a home you already own. We invite you to explore the home buying process with Guidance Residential today. You can also instantly calculate an estimate specific to your personal situation with our finance calculators online.
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 and get started on your home finance 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 September 2021, updated October 2024.
