Have you ever wondered how Islamic home financing options like University Islamic Financial and Guidance Residential work, and how they are different from conventional interest-based mortgages?
First, let’s review how conventional mortgages work. The home buyer takes out a loan with a bank, for instance, and a fixed or adjustable interest rate is applied based on various factors. The monthly mortgage payment is made up of principal, which is the actual cost of the home, and interest. Earlier in the life of the mortgage, interest makes up a greater proportion of the mortgage payment. As the loan progresses, a greater proportion of the loan is principal.
Now let’s look at Islamic home financing.
With University Islamic Financial, or UIF, they buy the home on the individual’s behalf by paying 100% of the purchase price. Then UIF marks up the price and sells it back to the individual who actually wants the home. UIF basically provides an interest-free loan to the homebuyer. It factors in its profit up front and calculates equal monthly payments for the individual to make.
Guidance Residential has a different model called the Declining Balance Co-ownership Program. It’s easier to explain with an example. Suppose someone wants to buy a home that costs $100,000, but only has $20,000 saved up. Basically what happens is that the home buyer enters into a partnership with Guidance. The individual puts down $20K, and Guidance covers the rest. The home is now co-owned by the individual and Guidance, with the individual owning a 20% share of the property and Guidance owning 80%.
Next, the individual begins to pay down the $80K balance that Guidance currently owns. The payments may go through a bank, but the bank simply acts as a bill collector and forwards the payments to Guidance. Over time, the home buyer’s share of the property increases, while Guidance’s share decreases.
For helping the individual purchase the home, Guidance does charge what it calls profit, for use of the property. You can think of this as rent. Guidance owns a chunk of the property, but is allowing the actual homebuyer full use of it.
I hope this helps clarify how Islamic home financing works. To learn more about purchasing a home for personal use or as an investment, along with many other topics related to building wealth in a halal way, check out my book, Open the Door to a Wealthier Life. It’s available on Amazon in paperback and Kindle format. Thanks for reading.