A home buying process requires a large portion of money in the USA. Not Everyone in the USA can afford to buy a home with total cash. Therefore, bank loans are the primary method for purchasing a house for an average person in the USA. Traditional banks charge interest and make profits by lending these loans. And the way they set their interest can easily be considered "Riba" in Islamic terminology. However, Islam prohibits the "interest" or "Riba" based on many Ayats and authentic Hadiths of the prophet (SWA). Details of the prohibitions of 'Riba' are explained in the later section. For the practicing Muslims in the USA, it becomes challenging to buy a house as they can't take the conventional Riba-based loan. In that context, in the last 20 years, some organizations in the USA started to give "Islamic" home loans as an alternative for practicing Muslims. In this article, we attempted to prescribe the current situations and choices of these home buying methods and their pros and cons from a user perspective. It should be noted that we are not affiliated with any lending organization or any scholarly board, and all the opinions are our own. We are just sharing our experiences and learning about the subject.

Buying with Loans vs Cash:

We would like to emphasize the economic situation and home buying options before jumping to the details of Islamic options. Even in a non-Islamic context, buying a home with loans can be a financially poor choice. Let me give a scenario; a home can be purchased by cash or loan. Typical home loans come with a 30 years contract with huge interest overhead. For example, a 300k house with 6% interest can cost nearly double within 30 years. And generally speaking, home rents are typically cheaper than mortgages with the same size apartment. Plus, renters don't need to worry about the repair or maintenance cost of the rented unit as usually, the house owner takes care of those. Now, if one can live in a rented apartment and religiously save money for house buying, he can invest that money in the stock market and increase the profit. The S&P 500, a popular stock index, rose 10.5% on average from its 1957 inception through 2021. That means, even with 6% interest on the home loans, with the same rate of SNP500, one can still make 4% extra money each year. And if they can keep that cycle, they can get enough money in less than 30 years and buy the house in cash. Economically, by saving these, one can avoid extra money banks take and save a lot. Now, the disadvantage of this method, most people aren't able to have that patience, SNP 500 doesn't have guarantees for future years, or inflation can be problematic in the recession years. Still, buying a house with cash is always better in many metrics, and saving money to buy a house with cash can be a viable option. Therefore, Islamically, if somebody thinks they have patience and have no major problem waiting for the home, they should do that. Now, if the circumstances are unfavorable for the person, he can choose a loan option.

Islamic paradigm under Fiat Currency:

It is also worth pointing out that having assets over currency can be beneficial. In the USA, the primary saving medium from a salaried job is fiat currency, aka the dollar. The dollar was initially introduced into the world economy in 1944 as a replacement for gold as an alternate transaction medium. If anyone wants to have gold, they can exchange dollars and get gold from the bank. The system is commonly known as the "gold" standard. But during the first world war, scenarios changed; fiat currency was introduced, and it became the global currency. By doing so, the dollar came with a caveat that did not exist before: inflation of the currency. With introduction of dollars, government or anybody in authority who can print dollars can de-valuate it by creating inflation! So if someone saves a dollar for a long time, technically they will lose money as it depreciates. As any asset no longer influence the fiat-currency ,it might be financially viable to buy assets to save money instead of actually saving dollar. In this context ,buying home with loan might even make more sense than traditional economy ,as person immediately possesses large chunk of asset.

Now, in perspective of Islamic ruling of finance, fiat-currency creates significant confusion within existing scholarly works on economics. Traditionally, ruling of fiqh on Zakat, Riba, and transactions are considered with underlying principle that money will never de-valuate. But with fiat currency, it does. Thus ,a deeper understanding of modern economy and adjustment of the rulings is required under sharia principle to address home buying issue .Therefore ,for Muslim ,it might be a better option to buy home or asset as soon as possible by utilizing existing home buying options.

Choices of a Muslim have in home buying:

Considering the modern economy, in one way, Muslims in the west are experiencing asset devaluation and facing riba-based transactions for living. And in the other way, the issue of “riba” needs to be taken seriously to practice the deen correctly. In this context, what should a Muslim do when it comes to home buying? According to many scholarly positions following options can be done:

1. Save cash, live in a rented apartment until then, and buy the house. [ Best and preferred choice]

2. Go for “actual” Islamic loans.

There are many opinions on this matter, but we wouldn’t cover that subject in this article. In general, Islamic loans could be a viable option, but before going into these loans, one should first understand the details, the reality of these loans, and their Islamic validity. In the following section, this topic is explained in more detail.

Islamic Finance (IF) vs Conventional loans :

Let's discuss why Islamic finance is halal compared to traditional loans/mortgages. Allah made business halal and "Riba" haram . Generally, Islamic finance buys a house based on the preference of a home buyer and sells the house to the home buyer with a profit. It is different from a traditional loan, where the bank only gives money to the buyer and asks for a return of funds with interest. In Islamic finance (IF), the organization takes "ownership," but traditional banks only care for the money. In Islamic Finance, the buyer gives back the borrowed "money" without any interest to the organization, whereas conventional banks ask for money with interest. More resources are available to understand this subject from various organizations:

1. https://www.youtube.com/watch?v=DZeE3FPWza0&ab_channel=GuidanceResidential

2. https://www.youtube.com/watch?v=OvnF2f2MZug&ab_channel=IMF

3. https://www.youtube.com/watch?v=V6-3NnYb0ng&ab_channel=IslamicFinanceGuru

4. https://www.youtube.com/watch?v=-nm6qluYPXY&ab_channel=UIFCorporation

However, this concept is currently applied in some sense in the "theoretical" realm. Let's look at the options of home financing organizations in the USA and dissect the details of the process.

There are three major types of Islamic contracts available in the USA.

1. Diminishing Musharakah

2. Murabaha

3. Ijara

Most Islamic finance companies in the US offer the "Diminishing Musharakah" model and are more agreeable to scholars. Compared to a conventional loan, the model has some differences. In traditional loans, a lender or Bank lends money and gets money with interest, whereas, in this model, a house is bought by the lender, and the asset is transferred to a buyer based on the equity values of a home. Let's look at an example. Let's say a house price is 100k, and with a 20% down payment from the buyer, the remaining money required to buy the house is 80k. This 80k needs to be taken from someone, conventionally from the Bank. So Bank will give 80k but will ask to pay the Bank 80k in 30 years with an interest of 6%(assumed). The total amount of money the buyer needs to pay in 30 years to the Bank is around 170k. It means 90k extra money needs to be paid by the buyer just for the interest. In the "Musharaka" model, what the Islamic organization will do, they will ask the buyer to pay the downpayment and remanning 80k they will pay to the seller and own that portion of the house. Now to the buyer, the remaining asset of 80% they wanted to sell with a 110k profit, which means a total price of 190k. They will borrow the money to the buyer and ask the buyer to repay it each month with a fixed amount for 30 years. With each payment, the buyer will get a portion of ownership from the Islamic organization, and eventually, the buyer will own the house when they finish the payment. As there is no involvement of interest in this entire method, it is not "Riba" and can be considered Halal. On paper, in the context of Islam, it sounds great, but in practice, there are some issues that we need to think about.

The most common issue observed in these types of transactions is that the buyer/owner starts to see checks from lending organizations like interest-based banks a few months after the purchase. After some time, the Islamic organization no longer shows any liability for tracking the transaction; in some cases, bank checks show the interest rate that the Islamic organization is already taking on behalf of the buyer. In most cases, there are "almost" zero interactions with buyers and Islamic organizations after purchase, as if the organization only acted as a contract writer and never took true responsibility for what was bought. This practice has been legally defended during contract writing, which buyers rarely have a chance to change.

Another concern in this type of transaction is that the organization never took the additional costs like home insurance and taxes as a co-owner of the property into account. Technically on paper, the organizations are not only liable for the purchase of the house but also the taxes and insurance that come after purchase over time from state or federal entities as they own some portion of the house. The taxes are usually paid by the buyer of the home, never by the organization. That violates the contract's authenticity and Islamic principles of true ownership.

The buyers also saw terms like "compound interests" in some parts of the contract. Most organizations claimed that these terms were actually Federal mandated or the "laws of the land," but they had nothing to do with actual interest.

Available Organizations for Islamic Finance in USA (as of 2022 ):

Let's look at the Islamic Finance organization individually. The major companies that offer this are listed below :

1. Guidance Residential ( https://www.guidanceresidential.com/ )

2. UIF corporation (https://www.myuif.com/ )

3. Devon Bank (https://www.devonbank.com/)

4. Ameen housing ( https://www.ameenhousing.com/ )

5. LaRiba ( https://www.lariba.com/sitephp/index.php )

6. Ijaracdc (https://ijaracdc.com/ )

The most common loan model available in the USA and more popular is the owenrship-based model ( Shirkul Musharakah ). The organization like Ameen Housing, based in the SF Bay followed the model correctly with real-life scenarios. But the organization has a long queue and limited funds (max 800k loan). So not accessible for the most. Though the organizations like Guidance, UIF, LaRiba serve a sizeable Muslim population in the US. — none does "true" co-ownership-based mortgages.

The Shirkul Musharakah model, which is followed by Guidance and UIF, comes with all losses to be incurred on the borrower. For example, let's say someone buys a home for 100k with a 20% down payment. So they take an 80k loan. Immediately after purchase, due to urgency, the person needs to sell it. If the market cools off and the home is sold for 90k, while the contract ownership is 80:20, Islamic organizations will still expect to get the full 80k loan back. Technically, if the house is sold for 90k this means that Islamic organizations will get 70k (90k minus 20 k downpayment), assuming that they have major ownership of the house. But in reality, if someone sells their property for less than what was initially purchased for under these conditions set by Shariah law-the person would still need to pay back full amount of what was borrowed 80 k in this case . The same logic applies if someone makes a profit off selling their property;Islamic organization would not receive any part of those profits .

That being said, the key difference is that Guidance or LaRiba are not taking money from banks (a bank with investors' money to lend), so their revenue is not tied to any interest-based organization. For Guidance, the loan limit is formally set to the limit set by Freddie Mac (970k in HCOL). The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise- a private co. They sell MBS or mortgage-backed security to the investor. To maintain market balance, the government buys their security to support housing market demand. Companies like Guidance sell their loans to Freddie Mac( FM ), and hedge their risk. So basically, Guidance funds by selling the contract to FM, and the rest comes from the buyer. Essentially the process becomes a middle-man process, where a Muslim buyer directly does not go to a traditional bank, but Guidance connects them to make it halal. However, they defend this practice in their article and found in the following link :

• https://www.guidanceresidential.com/resources/faith-based-financing/why-does-guidance-sell-its-contracts-to-freddie-mac/

In summary, their claim is that FM is not a loan or bank. So as an entity, they are halal. Any transaction with them is halal because the contract by Guidance finance was specifically "halal." They also claim that Islamic scholars back their agreement and that it validate all the criteria of the diminishing musharaka model.

Although the University Islamic Finance (UIF) offers primarily the "diminishing musharaka", they are a subsidiary of the university bank and therefore some may question their legitimacy to offer such financing. Additionally, UIF allows jumbo loans (more than what is set by Freddie Mac) up to 1.5 million with only a 30% down payment; this could be seen as high-cost living. Under their contract, there are some ARM-based loans which are valid for five years; again, raising questions about their legitimacy. In defense, UIF provides justification as follows:

• `Our majority shareholder is a bank, but we do have other outside minority shareholders. And, to imply that UIF is a “bank” because one of its shareholders is an FDIC-insured bank is factually and legally incorrect. Banks often have subsidiaries such as insurance agencies and investment management companies, and these subsidiaries are not “banks” because of their status as the subsidiary of an FDIC-insured bank. Further, UIF has insulated its business from our parent bank to ensure that all of our products and business dealings are sharia compliant.`

Also as a defense from both UIF and Guidance, why they don’t share the taxes or maintenance as an owner is as follow :

• `Property Maintenance: As per our agreement the Customer is responsible for maintaining the property. All repairs and maintenance is the customer’s responsibility. Proper maintenance of property increases property value over time and this benefits the Customer directly in the form of price appreciation.

• Property Taxes: Real Estate Property Taxes benefit the Customer and their families. RE Taxes support schools, libraries, fire departments etc. Since only the customer benefits from these services they are responsible for property tax payments.

• HOI: Home Insurance is required when you finance a property. If the home is damaged due to fire or other calamity, the home insurance proceeds help pay for the repairs. Just like you have to purchase auto insurance when you drive a car, you must obtain Home Insurance when you finance a house.`

Additionally, their defense on why they charge late fees :

• `There is a flat fee of $50 that is used to compensate for the cost of third party collection. We do not charge you an arbitrary percentage of your monthly payment as others may. This is paid to a third party company that makes collections on our behalf at the same cost to you.`

For LaRiba, they go with the same FM as their first mortgage, and on top of it, they go to another bank [ Bank of Whittier, https://bankofwhittier.mymortgage-online.com/ ], who gives them a second loan of 15 years. The profit rate for this "jumbo loan" is the similar as what FM proposes. So they also act as a middle man like Guidance and UIF . An explanation of their loan taking is given as follows:

• "LARIBA DOES NOT BORROW MONEY FROM FREDDIE MAC / FANNIE MAE NOR SELL LOANS. Freddie Mac / Fannie Mae is an investor in the LARIBA Financed Homes. Every single home is presented to Freddie Mac / Fannie Mae online for approval or disapproval. If approved, LARIBA would forward the money from its own funds to purchase the house and is paid within a week or less by Freddie Mac / Fannie Mae. LARIBA does not charge Freddie Mac / Fannie Mae interest for using the money during that week’s time."

Ijaracdc is one of the lesser known organizations to do Islamic finance in the USA. Instead of terming the loan as profit like other organizations, they follow the "ijara" model and goes with a "rent2own" model. In practice, they usually take loans or sell contracts to conventional banks, act as a trustee, and ask the buyer to pay the money in the form of "rent." Once the buyer has finished paying off the house or wants to sell it, he would transfer $1 to the trustee, and the house's ownership would be transferred from trustee to buyer. The $1 is necessary because for a Shariah-compliant transaction there has to be a nominal exchange when property is transferred from trustee to buyer. According to Guidance Non-Musharakah based methods have problems. They stated as follows:

`In Ijara, the home buyer is basically a tenant for the entire period of the contract and does not enjoy the benefits of homeownership until repayment is complete. Meanwhile, Murabaha creates an obligation for the home buyer that resembles debt. So Diminishing Musharakah has been deemed by the most highly respected scholars in Islamic finance as the best option`

Among all these options, Ammen housing seems more legit organization Islamically. They offer true co-partnership programs, but they have a cap on providing loans, and one must wait for their approval. There is a waiting list.

In addition to the above analysis, this article can be useful to clarify the situation in more depth : https://www.amjaonline.org/amja-resident-fatwa-committee-resolution-about-islamic-home-financing-companies-in-the-us/

Also a great example from this pdf,: https://www.hocmn.org/wp-content/uploads/2021/04/no-interest_lending_square_v7.pdf

Concluding points

Based on the above discussion, we can conclude some points before making a final decision on the current status of "Islamic Home Loan" in the USA:

1. Involvement of Interest-based Organization: After making the Musharakah contract, in a proper Islamic transaction, the organizations should pay the entire purchase price by themself. On paper, they do! But in practice, once they do, they ask for "investment" from Fredi Mae, Freddie Mac or Banks to cover that up. Basically, they agree to pay the price but sell immediately to a large organization, taking a small amount of profit from the house purchase agreement and the rest of the profit transferred to these governments or banks to hedge their money. Now investments in these organizations are highly debatable especially when a second bank is involved in the process. These conventional economic bodies run and profit by interest. So legality of original buyer's contract becomes questionable. In this defense their claim is that they can't operate without abiding by US policies even if it means partaking in this type of practice which primarily exists to cover loss incase of loan defaulters.

2. Ownership Dilemma: Islamic finance provides co-ownership, which is backed by assets instead of "money over money," a.k.a "Riba". However, if one wants to claim they have the assets, Islamically, they need to own the property for some time. Now Islamic organizations, in practice, don't want to hold the house for some time to validate as an owner. Also, in the contract, they will force buyers to waive their right of ownership in maintenance and other costs. Their claim is that as the title is transferred , buyers are accountable for their taxes , maintenance , HOA fee , insurance , etc., and the buyer is the one who will enjoy the benefits of the house . Therefore , according to this line of thinking , lenders have no responsibility to take on any such cost . But technically speaking In part lenders still own some portion of the house since it was purchased with a loan from them and should therefore share in some cost associated with ownership The entire process looks more like a formality in contract than anything else . In authentic Islamic scenarios sellers needs owns it for some period time before selling so that there can be no confusion about true ownership of said property . There are Fatways from scholars about day-trading not being halal for this exact same reason . Thus an Islamic person needs to apply their judgments and think about how the individual wants to perceive this idea.

3. Validity of real responsibility as an owner: Selling or asking for investment from other banks also creates another question of "true" ownership of the home by Islamic finance org. Because at the end of the day, buyers are liable to the FM or banks, not to them. This means they never owned the property; instead, they acted as a middle man. It creates the question of ethics where it is permissible but also, it is hard to define "haram" in an Islamic context.

4. Loss sharing: Loss sharing can also be seen in Islamic finances in the USA. Almost all organizations claim they share losses in the unfortunate events, contrary to the conventional loans where losses are not taken care of by the Banks. There is an interest-based penalty if the homeowner cannot pay in a conventional loan. Islamic finance does promise that they will not charge any such fee once such a situation occurs. Still, some of them, in reality, charge an "administrative fee," which can be translated as an interest-based penalty. Also, loss or profit sharing does not apply to selling houses with low or high prices compared to the buying price. They will claim they will share the cost of the house if disaster strikes and bear the losses. But in any such case, insurance already covers repair costs and Islamic organization force buyer to take insurance. So in a sense, they actually "never" take any hit from losses practically speaking , which questions contract's validity.

5. Mandatory insurance: In the Islamic system, insurance is also an impermissible transaction. But all these organizations will force the home buyer to buy insurance in the name of US laws. So the validity of the contract also became questionable Islamically.

We believe that any Muslim who feels comfortable with the above points and has a good justification for their choice can go for Islamic finance. It should be noted that, as of August 2022, Ameen Housing and Guidance Residential (under needy conditions) are two organizations endorsed by the Assembly of Muslim Jurists in America (AMJA). The following table summarizes the metrics of various orgs in terms of reliability.