Halal mortgages in the US

Most families start by searching for a "halal mortgage". It's a useful phrase, but it hides a problem: a mortgage is a loan, and the whole point of halal finance is to avoid a loan that earns a guaranteed return. So what's actually on offer in the US, and how do you tell the options apart?

The main structures

Halal home financing in the US mostly uses one of three structures:

  • Murabaha. The provider buys the home and sells it to you at a disclosed markup, paid in installments.
  • Ijara. The provider owns the home and leases it to you, often with an agreement for you to buy it over time.
  • Diminishing musharakah. You and the provider own the home as partners, and you buy out the provider's share over time, paying rent on the part you don't own yet.

Each of these can be done well. Each can also be set up so that, in practice, it works almost exactly like a conventional mortgage.

What a real partnership shares

Shaykh Umer Khan gives a simple test for whether a co-ownership is a true partnership. The provider should share, by its ownership:

  • property taxes
  • home insurance
  • major repairs
  • profit when the home gains value
  • loss when it loses value

A conventional mortgage shares none of these. Neither does a murabaha: the provider buys the home, sells it to you at a markup, and you make fixed payments until the total is paid. Mufti Taqi Usmani, one of the best-known scholars of Islamic finance, holds that murabaha should be used only as a last resort, because it sits so close to an interest-bearing loan.

Where the doubt comes from

Families who've been through the process often describe the same things: a monthly payment on a fixed schedule, a "profit rate" that moves with interest rates, every cost of the home on them, foreclosure if they fall behind, and statements arriving from Fannie Mae or Freddie Mac after closing. When that happens, the contract has an Islamic name but the substance of a loan. Halal finance, back to basics explains why the substance is what matters.

Questions to ask any provider

  1. Who owns the home? A real co-owner on the title, or a lender with a lien?
  2. Who pays when something big breaks? Are major repairs, tax and insurance shared?
  3. What happens if prices fall? Does the provider lose value too?
  4. What happens if I can't pay? Foreclosure? Late fees?
  5. What is my payment based on? Rent on the provider's share, or a rate that tracks interest?
  6. Who ends up holding the contract? Does it get sold to Fannie Mae or Freddie Mac? (Why that matters.)

How co-owning a home with Neeyah works

We buy the home together. You put in at least 20%, and our investors fund the rest. You pay rent only on the part we own, based on the market, and buy more of the home over time at its market value. We share property tax, insurance and major repairs by ownership, and if the home loses value, our share does too. There are no late fees, no foreclosure, and the home is never sold to Fannie Mae or Freddie Mac. The Assembly of Muslim Jurists of America ruled the model permissible, not just "permissible in need" (about the fatwa).

We co-own homes in 24 states. Doing it this way means raising money directly from investors, so there's a waitlist, and we're expanding into as many markets as we can.

Watch the session

Shaykh Umer Khan walks through all of this, from why riba is prohibited to how musharakah and murabaha models compare and what AMJA found, in our session How halal are Islamic mortgages?

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