Buying foreclosed homes

Assalam-o-Alaikum,

Sir, I heard about a fatwa given by you that if a bank own a house we can  mortgage that house and it would be permissible. Is this accurate? Please explain the reasoning for this.

 بسم الله الرحمن الرحيم

الجواب حامدا ومصليا ومسلما

The fatwa you are referring to was given in the United States and is in regards to the system of buying foreclosed homes in the United States.

In a normal house financing scheme, if the buyer does not have sufficient funds to immediately pay the full price, he would take a loan from a third party (i.e the bank). Thereafter, the seller would take the full price of the house and the buyer would gradually pay off the loan along with a sum of interest. This type of loan is haram. Consider the following verse from the Qur’an and hadith:

“Allah had made business lawful and interest unlawful.”

 (Surah al Baqara: 275)

Jabir (may Allah be pleased with him) said that Allah’s Messenger ﷺ cursed the acceptor of interest and its payer, and one who records it, and the two witnesses, and he said that they are all equal.

However, if the house is in the ownership of the bank and an agreement has been made that it may be paid off in installments with the condition that interest will also be charged, such an agreement would be permissible since it would not be classified as interest in shari’ah.

According to Islamic law, this added fee will not be regarded as “riba” (interest) because it is being paid to the seller and not to a third party which is advancing a loan. Rather, it will be understood that the price of the house has been increased because it is being paid off on installments. Therefore, such a transaction would be permissible. However, it is not permissible to raise the price afterwards due to late payments or increase in the value of the house.

In Canada, the installments are usually divided over a period of 5 years. If the house has not been paid off in this period, the upcoming installments will be increased. If this is the case, the extra sum added to the installments will be regarded as interest and will be impermissible to pay. 

In conclusion, it is permissible to mortgage foreclosed homes, provided that two conditions are fulfilled:

1) An agreement has been made on a fixed price which is not subject to fluctuation.

2) One will be able to pay off all the installments in time without being charged extra in the future.

والله اعلم

Allah subhanahu wa ta’ala knows best.

Taha Abdulkareem

Approved by Mufti Husain Ahmad Madani