Q. What do you mean by Shariah-compliant home financing?
Shariah-compliant home financing is a type of financing that does not violate the principles of Islamic law. There is a set of rules and injunctions from the Quran and Sunnah regarding what is permissible
and not permissible when it comes to the day-to-day financial transactions of Muslims. Among the prohibitions are riba (usury / interest), gharar (speculation or contractual uncertainty) and maysir
(gambling), for example. When you finance your home with a conventional mortgage, it requires the payment of interest (riba), which is prohibited in Islam and all monotheistic and even some non-monotheistic
faiths. Guidance Residential's Shariah-compliant home financing program does not involve riba. The Declining Balance Co-ownership Program that Guidance Residential offers is a participatory financing
program, which is based on equity partnership between Guidance and the customer. The following are the unique differentiating factors of Guidance Residential's program from a conventional mortgage.
Co-ownership
Guidance Residential and homebuyers each own a percentage of the property as co-owners. Homebuyers increase their share over a period of time through a monthly payment that results in a corresponding
decrease in Guidance's share.
Risk sharing
The risk is shared if the property is lost in the case of a natural disaster, or a public service project initiated by the government forces you out of the property. In this situation the proceeds provided
by insurance or government are shared based upon the percentage of ownership at the point of the loss. In a similar situation, conventional loan providers will apply the proceeds to pay off the loan without any allocation.
Riba-free
The Declining Balance Co-ownership Program does not involve payment of interest between a debtor and creditor. It is 100% riba-free.
No pre-payment penalty
There is no pre-payment penalty required by Guidance Residential when a homebuyer wants to pay ahead of the agreed schedule.
Capped late payment fees
In the event that late payments occur, Guidance Residential will only charge a capped fee equaling $50 or less, exclusively meant to cover the expenses involved in administering a late payment, rather than the conventional 5% penalty.
Non-recourse commitment
In the event of payment default, Guidance Residential does not pursue any of the homebuyer's other assets.
Q. How does this program work?
Guidance Residential and the homebuyer engage in a co-ownership venture where each owns a percentage of the home, in proportion to the equity they each contributed. Homebuyers are required to make monthly
payments to Guidance Residential over a predetermined period of time in order to completely buy out Guidance Residential's shares in the property, and own the property outright. The monthly payment consists
of two portions; (1) an amount for the acquisition of a portion of Guidance Residential's ownership interest (Acquisition Payment) and (2) the other for the exclusive use of the entire property that
includes Guidance's share (Profit Payment). The Acquisition Payment serves in buying Guidance Residential's shares of ownership over the predetermined period of time and the Profit Payment is akin to
rent or use of property of another.
For instance, if you are looking to buy a $300,000 home and you have $30,000 of your own money to contribute towards the purchase of the home, Guidance will contribute the remaining $270,000 in funds to purchase
the home together. Guidance will purchase the property along with you and we will form a co-ownership agreement stating that we both own the property together. Then, we set up a 15, 20, or 30-year contract in
which you make a monthly payment to Guidance Residential. A portion of that payment will go towards buying out Guidance Residential's ownership. The other portion of the monthly payment is for the exclusive
use of the property. The utilization fee that we charge you will decrease every month as our ownership in the property decreases and the portion that goes to buying Guidance's ownership will increase by that
same amount so that the monthly payment stays constant.
In accordance with the terms of the co-ownership agreement, you can sell the property at any time and any profit from that sale will be 100% yours. For instance, if after 5 years, you sell this property for $350,000,
that extra $50,000 will be all yours.
Q. How is it different from regular loans?
Our Shariah-compliant home financing program does not constitute a debtor and creditor loan arrangement. Lending money to profit from any commercial or investment activity including the financing of
real estate is not an acceptable method for commerce, according to Islam. Therefore, our home financing program has been modeled on the Islamic financing concept known as "Musharakah Mutanaqisa" or
"Diminishing Partnership." The relationship between Guidance Residential and the homebuyer is that of co-owners in a property and not that of a borrower-lender. The initial financing provided by
Guidance Residential is applied to acquire an interest in the property and not to provide a loan.
Watch our FAQ video: What is the difference between Guidance's Shariah-compliant home financing program and a mortgage loan?
Q. What makes your program Halal?
The unique thing about Guidance Residential is that we brought together seven of the leading scholars in the world on Islamic finance. These scholars are all widely known for their expertise in Islamic
legal jurisprudence in financial transactions and they come from across the globe. The Scholars help us offer a product that is both Shariah-complaint and work within each individual states' home
protection laws. Our Shariah Supervisory Board has authored numerous fatwas on various aspects including one on the overall structure.
Check out video library to find more about the program.
