An Islamic mortgage is home financing that avoids interest by using a sale (murabaha), a lease (ijara) or a co-ownership partnership (diminishing musharaka) instead of a loan. In the United States, providers commonly use all three structures, the Federal Reserve Bank of Chicago has noted, and they still have to comply with ordinary US mortgage, title and consumer protection law.
This guide is general information, not legal, tax or religious advice.
How do the three Islamic mortgage structures work?
| Structure | How it works | Your payments |
|---|---|---|
| Murabaha | The provider buys the home and sells it to you at a higher, fixed price | Instalments of the agreed sale price |
| Ijara | The provider owns the home and leases it to you, with ownership passing at the end | Rent plus amounts towards purchase |
| Diminishing musharaka | You and the provider co-own the home; you buy out its share over time | Rent on the provider’s share plus buyout payments |
All three are recognised in the Shariah standards of AAOIFI. For a fuller explanation of each contract, see our guide to Islamic finance contracts.
How do US regulators treat Islamic mortgages?
US regulators have generally looked at the economic substance. The Chicago Fed notes that the Office of the Comptroller of the Currency (OCC) has treated certain murabaha and ijara home finance arrangements as functionally equivalent to secured real estate lending, which allows national banks to offer them. In practice, that means you will usually receive the same federal disclosures as a conventional borrower.
The Consumer Financial Protection Bureau explains that the Loan Estimate sets out the terms, projected payments, fees and other costs. Islamic products may describe the provider’s return as profit or rent, but the Loan Estimate is the best way to compare total cost with a conventional mortgage.
Is an Islamic mortgage cheaper?
Usually not. Providers price their profit or rent with reference to market rates, so monthly payments are often similar to a conventional mortgage and fees can be higher because of extra documentation. Watch for any large final payment: the CFPB warns that balloon structures can leave buyers owing a large sum at the end of the term.
Can I get an Islamic mortgage in my state?
It depends on the provider. Availability varies by state licensing, property type and loan size. Some providers lend in many states, others only in a few. In states such as Virginia, also check that your closing attorney and title company are familiar with the structure, since the documents differ from a standard note and deed of trust.
Checklist before you sign
- Confirm the provider is licensed to lend in your state and on your property type.
- Ask which structure is used and get a plain-language explanation.
- Compare the Loan Estimate with at least one conventional quote.
- Ask who pays property taxes, insurance and major repairs at each stage.
- Check early payoff, refinancing and sale terms.
- Check late payment and default terms, including whether late fees go to charity.
- Ask for the Shariah board’s approval and check that the documents you sign match it.
- Get independent advice from a real estate attorney and, if you wish, a trusted scholar.
Related reading: a profile of Sultan Choudhury, who led the Islamic Bank of Britain, later Al Rayan Bank, as CEO.
FAQ
Legally it is usually documented as secured home finance, but the contract is a sale, lease or partnership rather than an interest-bearing loan.
Providers use murabaha, ijara and diminishing musharaka. Diminishing musharaka and ijara-based models are widely offered by specialist providers.
Generally yes. Buyers typically receive a Loan Estimate and Closing Disclosure, which make cost comparison easier.
