With an increasing number of programs that claim to be in accordance with Shariah it can be difficult to determine which ones are legitimate and which ones are traditional mortgages that have been reworked using Islamic terms without changing the basic structure of an interest-based loan.  Here are some questions that can help you pinpoint which programs offer only the illusion of adhering to Islamic Law and which ones adhere in reality.

Is it a Loan?

Any program claiming Shariah compliance will say that it isn't, since the only loan that is acceptable in Islam is Qard Hassan (a Fine Loan) that is paid back without any increase of any sort. But, most programs are indeed loan-based and here are a few questions that you can ask to make sure that the claim of no debt is accurate.

Will I be asked to sign mortgage paperwork with a lien against the property? 
If the answer is yes, then ask: Why?

It is common for people to be told that it is because of regulations, but in reality the regulations:

  • Apply only to lenders
  • Never require mortgage paperwork to be signed, they only require disclosure of the terms of the loan

Do you work with Freddie Mac or Fannie Mae? 
If the answer is yes, then there is no room for the program to be anything but an interest-based loan. Freddie Mac and the like are chartered to work with interest-based loan and legally, have no mandate to work with anything else.

Do I have to get PMI (Private Mortgage Insurance) or pay an amount similar to it? 
PMI, by definition, insures mortgages where the borrower has less than 20% equity at the time of purchase and is intended for the benefit of the lender in case the buyer defaults. It is not a legal requirement but it is something that lenders require for their own benefit. Any program that requires you to get PMI or pay an amount similar to it is beyond any doubt an interest-based loan.

Is it Murabaha (payment plan)?

If so then the following questions will help you to discern whether it is, in fact, a legitimate purchase with a payment plan or if it is simply a loan-based program using terms that sound good but do not comply with Shariah.

Am I buying from you and are you the seller ON RECORD? 
If the answer is no, then it is not a true murabaha since he who does not own, cannot sell.

Is the purchase price on record going to be the total payments I will make? 
If the answer is no then it is not a true murabaha. If they say that it is better for your taxes and cheaper for you if you “pay it off” sooner it is further proof that you are dealing with an interest-bearing loan.

Will the sum of the total payments I make be less if I pay early?  
If the answer yes, then it is an interest-bearing loan.

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