Took a mortgage thinking it was an Islamic transaction
2-6-2005 | IslamWeb
Question:
We put the down payment for a house and had a deal with an Islamic institution officials who said they will finance us Islamicly. Two days before we are closing, we found that they are dealing with a bank and taking the loan from a bank and giving us at very high interest rate and calling it Islamic financing. Now we are stuck, we can't back out from the deal as its finalized and the people who are selling the house have already bought another house waiting for us to pay them. What can we do now? Can we buy the house from a bank on mortgage at very low interest rate and then sell later? Do we go with the so called Islamic financing and pay a real high rate they are asking us? What if we buy the house on mortgage at very low interest rate and then become unable to find a buyer quickly? We are stuck and need help. There is no one who can finance us purely in the name of Islam. What step should we take? We never wanted to pay interest.
Answer:
All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad 
is His slave and Messenger.
Once the debtor receives a loan, it becomes his property and is considered as a debt on him, whether that is a loan with interest or else. The jurists 
stated that a loan that one receives by a void contract becomes his property.
So, if it is confirmed that this institution borrows money with interest, then this borrowed money becomes its property and a debt, so there is no harm to deal with such an institution on the condition that the transaction is in principle permissible.
The fact that this institution obliges the customer to pay a greater amount of benefit than the interest charged by the bank to the customer, is not an excuse for you to deal with the bank that deals with usury and interest in this kind of transaction or any other transactions.
Lastly, it should be noted that the people who are running such an institution should be advised and warned about the evil fate of those who deal with interest and usury.
The Prophet said: “Allaah has cursed the one who consumes Ribaa (i.e. usury or interest), the one who gives it to others, the one who writes it down and the one who witnesses it”. He said: “All of them are equal in sin.” [Muslim]
Allaah Knows best.