Home buying in US

6-10-2002 | IslamWeb

Question:

I live in United States, and I learned that there are some companies that sell houses by what they call "owner financing". Here is how it works: when I find a house that I like, they buy it and sell it to me. As an example, they buy the house for 90,000 and sell to me for 100,000. I pay a down payment of say 10,000. The rest, which is 90,000, is paid in 25 years at 5% interest rate. I made up these numbers for explanation only. Is this a Haram transaction? Would the interest be a Riba or profit? If all of this transaction is Haram, please explain a model that would be Halal?

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Answer:

All perfect praise be to Allah, The Lord of the Worlds. I testify that there is none worthy of worship except Allah, and that Muhammad is His slave and Messenger.

 

If this company purchases the house according a valid contract that makes the house its own property and under its warranty, and then sells it to the customer for a more expensive fixed price by installments, then such a transaction is permissible.

This transaction is known as Muraabahah (resale with a stated profit) and the profit that the company receives is lawful.

But, if the company lends the customer the value of the house and increases the value in return for repaying the whole amount of money by installments, without having the house as its own property or being under its warranty, then this transaction is a form of Riba (usury and/or interest), since it constitutes a loan that leads to a profit.

In fact, the first way is the only legal substitute.

Allah Knows best.