Islamic Compliant Real Estate Mortgages and Loans in New York State

Observant Muslims in New York State who seek financing for the purchase of residential or commercial real estate may have issues with traditional mortgage loans. The reason for this is that, under traditional interpretations of Koranic law, the payment or receiving of interest is considered forbidden (“haram”). While a thorough theological explanation is beyond the scope of this article, the main principal involved is that, under strict Islamic law, the exchange of capital alone for debt is not balanced by any significant advantage to the borrower, because it is not associated with the type of risk that a business venture would entail. Therefore, a loan of funds which generates interest for the lender, to be paid by the borrower, is considered profiteering and contrary to the laws of Islam.

Therefore, a traditional mortgage loan, in which funds are lent for the purchase of a property, either residential or commercial, and the funds are paid back over time to the lender with interest, would be considered non-compliant with Islamic law. This prohibition would apply both to the borrower as well as to the lender.

This raises a dilemma for an individual who wishes to purchase real property. The first solution which comes to mind is simply to pay the full purchase price for the property, and not obtain any type of loan. However, most people do not have the funds to pay for a property “up front,” and therefore require a loan of some type in order to complete the transaction. Most home purchases in New York State require a 10% downpayment of the purchase price. For example, if the purchase price is $500,000.00, the purchaser would pay $50,000.00 prior to closing, and the remainder at closing. At closing, most purchasers would then use funds loaned to them by a bank or other institutional lender to complete the transaction. The lender would record the mortgage on the property to secure the loaned funds. The purchaser would repay these funds over time, paying annual interest on the amount borrowed.

This type of transaction is obviously incompatible with the traditional Islamic ban on the paying or collecting of passive interest (“riba”). There are several alternatives for a real estate purchaser who wishes to purchase property but who does not have the funds to pay the full purchase price. One type of alternative is a loan in which the bank or lending institution buys the house and gradually sells it to the home buyer, with an additional profit rate added to the purchase price. For example, the bank would buy the home and lease it to the buyer, who pays off the purchase price, also paying market-based rent for living at the property.

This concept can also be used in commercial property. Under such an arrangement, an “Operating Ijara Agreement” is entered into, which is a leaseback of the premises under which rent would be pay in amounts equivalent to those due to a lender under a standard purchase loan agreement. At the end of the Agreement term, the parties would agree to re-convey the property to the Owner, assuming that all payments have been made.

Another vehicle which may be acceptable is a legal partnership between the lending institution and the purchaser. Under such an arrangement, the shares of the partnership are gradually transferred to the purchaser from the bank over time, as the purchaser makes regular payments to the bank which represents their purchase of the shares of the partnership, rather than interest on a loan.

All of these arrangements have legal and tax implications for both the lender and the purchaser of the property. Weiss & Weiss is familiar with all of these types of transactions and is ready, willing, and able to work with any potential real estate purchasers who want to ensure that their transactions are harmonious with their religious beliefs and the regulations relating thereto.