Johanna Osman, executive director of Sakan Community Resource, works at the organization’s office in Bloomington, Minnesota. Credit: Ben Hovland | Sahan Journal

After graduating from the University of Minnesota and getting a full time job at the Metropolitan Council in Saint Paul, Mahad Omar wanted to start investing in real estate. But amid one of the wildest housing markets in decades, with more buyers than homes available, the median price for a home in the Twin Cities ballooned to a record $327,500.

The competition presents special challenges for Muslims buying homes in Minnesota, many of  whom face special difficulties financing loans.

Because Mahad is Muslim, he wants to make sure he goes about buying real estate in a halal, or religiously compliant, way. A conventional mortgage charges interest, and it’s impermissible for Muslims to pay or charge interest. This stems from a rule in Islam that dictates Muslims cannot profit off the act of lending or receiving money. 

“Trying to make halal financing work in a system where the American banks literally run on interest is difficult,” Mahad said. “There’s a lot of gray area for people.”

Because Mahad would be buying real estate as an investment rather than a necessity, he wants to be extra careful about avoiding interest. There are a few transaction processes that align with the faith, because they’re not interest-based. Instead, halal loans create partnerships between the lender and the homebuyer. The repayment process in the partnership leads to the buyer ultimately claiming full ownership of the property.

There are a few different halal loan providers in the United States that serve customers in Minnesota. But Mahad has found that halal brokers tend to be more expensive. And there isn’t much information out there to begin with. 

Another challenge: With home prices reaching new heights, many home shoppers need assistance finding the money for a down payment. (On that $327,500 Minnesota home, a 5 percent down payment would necessitate having more than $16,000 on hand.) And the state and federal programs designed to help with down payments almost universally involve interest. 

Mahad wondered: If someone else were in desperate need of a house, would they consider bending the rules—that is, taking out a more conventional mortgage that includes interest? And what are those rules anyway?

“The barrier for entry to become a homeowner is just rising when it comes to halal loans,” Mahad said.

Researching the buying options—and then researching some more.

Like other Muslim homebuyers in Minnesota, Mahad dived into almost a year of research to better understand his options. The process can be confusing—and pricey. 

Some buyers take out loans that accrue interest without realizing what they’ve done. Some choose options that don’t fully comply with certain religious guidelines. Others have trouble affording the down payments demanded by Islamic financing providers. 

There are three providers that operate in Minnesota approved by the Assembly of Muslim Jurists of America: Guidance Residential, University Islamic Financial, and Devon Bank. Jameel Ahmed, a local representative at University Islamic Financial, said that a higher demand in housing has made things hectic at the company. In the last year, he said, the company has closed about $1 billion in residential contracts across the country.

“That’s huge for an Islamic bank,” Ahmed said. “And that’s only residential contracts.”

Mahamud Gorod, a local representative at Guidance Residential, agreed: He sees a rising Muslim demand for home-buying, based on the growth at Guidance Residential. Gorod said they’ve been closing approximately $110 million in contracts across the country each month. 

The state does not track homeownership by religion. But the Somali population—the state’s largest Muslim population—can provide a snapshot of the community. According to the Minnesota Chamber of Commerce, the homeownership rate for Somalis living in Minnesota has increased. 

After a wave of Somali refugees settled in the state, the homeownership rate stood at 1.7 percent in 2000. The rate increased to 9.4 percent by 2018. But compared to the native-born population in Minnesota—73.9 percent of these Minnesotans own their own homes—the Somali population is still lagging behind.

Minnesota Compass, a research agency that tracks data about immigrant communities, reported that 90 percent of Somalis in Minnesota rent rather than own homes, as of 2019. One factor here, as housing prices rocket upward: The median household income for Somali households is $25,700, making affordability a serious challenge. 

High prices and even higher demand have posed barriers for Muslims trying to buy a home in Minnesota. And then there are the added barriers of special loans. With these factors in mind, Sahan Journal spoke with a few experts who explained how the process works from the religious end. We also spoke with halal loan brokers who walked us through the transaction process. 

The Islamic rules for financing a home are complex, but the gist of it is this: If you want to buy a home, don’t use financing options that charge interest. There are some exceptions, but Islamic scholars generally agree on this point. It’s easier said than done, though. 

We’ve broken down the basics and included some resources to help potential homebuyers in Minnesota.

Religious rules in the homebuying process

First, the religious rules and guidelines can be difficult to understand. There are a few different transaction processes that comply with the faith. 

Imam Asad Zaman, the executive director of the Muslim American Society of Minnesota, explained some of these processes and providers (with the caveat that the Islamic rules are much more nuanced than a one-hour interview would allow). 

“The root of the religious complexity comes from the prohibition in Islam that Muslims are neither supposed to receive nor pay ribaa, which essentially means interest,” Zaman said. “A standard home mortgage issued by Wells Fargo or U.S. Bank, for example, is ribaa-based. And a Muslim is allowed to neither pay that ribaa nor be the person who receives that ribaa.”

If a member of his mosque asks Zaman about the Islamic rules for taking out a loan to buy a home, he generally advises them on an Islamic ruling made in 2014. The Assembly of Muslim Jurists of America issues rulings on problems Muslims in the United States face, but which don’t yet have a clear Islamic solution. 

A quick introduction to Murabaha, Ijara, and Musharaka

Before delving into the Islamic loan process, it helps to run through what a conventional American mortgage looks like. These are the loan products you’d find at many American banks and financing companies. 

Borrowers typically make a down payment—often between 3 and 20 percent—-and make payments on the actual home cost (called “principal”) plus interest, over the course of 15 or 30 years. The homebuyer owns the property outright once the mortgage is paid off.

The three main Islamic loan methods employ different strategies to reach the same results. They include a profit for the lender—but that profit does not come from interest.

Murabaha: A homebuyer and financing provider agree to become co-owners of a property. The provider then sells the property to the homebuyer at an agreed-upon price paid in monthly installments. The homebuyer eventually purchases all of the loan provider’s ownership stake and becomes the sole owner of the property.

Ijara: Once a homebuyer selects a home, a trust—a kind of separate legal partnership—acquires the property and rents it to the homebuyer. Part of this contract includes fixed fees the lender receives as profit for assuming the risk in the transaction. The homebuyer then makes monthly payments to the trust. When the sum of the payments equals the original acquisition cost, the homebuyer gets full title to the property.

Musharaka: A financing provider will purchase a home on behalf of the homebuyer. The ownership of the property depends on each party’s investment. As the homebuyer makes monthly payments to the financing provider, the balance reduces, and the homebuyer’s investment increases. Over time, the homebuyer acquires full ownership of the property.

How an Islamic loan works for a $300,000 home

Guidance Residential and University Islamic Financial both provide Musharaka transactions. Mahamud describes this transaction as a partnership between the Guidance Residential and the customer. 

For example, if a customer wants to buy a $300,000 home, Mahamud will check their income and credit score to make sure they qualify to become a client. Then, the lender and the buyer agree on a down payment. 

If the buyer qualifies for a 5 percent down payment, Guidance Residential pays the remaining 95 percent. The customer pays that back through monthly payments. 

For a 30-year term, Mahamud calculated that the minimum monthly payment might be about $1,221. Of that amount, $742 goes to profit Guidance (which takes about a 3.125 percent profit rate), and $479 goes toward the homebuyer’s balance for the home. As the balance decreases, the homebuyer’s investment and share of the partnership increases until they hold full ownership. The buyer can also choose to make higher payments down the road without any penalty.

For more about the workings of Islamic loans, readers can review a guide here, compiled by  the Minnesota Homeownership Center, a nonprofit that provides leadership to other financial advisers. For an even deeper dive, the Assembly of Muslim Jurists of America’s have published their ruling, running through exceptions and clarifications to the rules surrounding particular transactions. 

Barriers to homeownership 

Once you understand the religious definitions for financing a home, accessing an Islamic provider poses added hurdles.

The Assembly of Muslim Jurists of America has approved the following Islamic providers: Guidance Residential, Devon Bank, University Islamic Financial, and Ameen Housing Co-Op (which operates in California).

They’ve also included rulings on other popular providers like Ijara Loan and Lariba here. The committee concluded that the models used by both of these companies deal with interest.

Mahad found that Islamic providers were a pricier option for him. Pricing a multifamily unit, he was looking at a 20–25 percent down payment through a few of the major Islamic providers. (An investment property often requires a higher down payment; depending on their income, someone who plans to occupy a home purchase may put down more like 5–10 percent.) 

So Mahad is considering holding off on his real estate investment for now. He’s waiting to land a higher paying job that will allow him to make a higher down payment through an Islamic lender.

“The additional fees when it comes to managing a halal loan just to make sure that it stays halal—it does cost more,” Mahad said.

Zaman is concerned that a lack of affordability might lead people to violate their faith and utilize conventional loans over Islamic loans.

“They’re competitive to standard market rates but they are not competitive to the best market rates,” Zaman said. “The root of it is, there are not enough competitors. There needs to be other small banks that step in.”

Ahmed, from University Islamic Financial, maintains that Islamic financing is not necessarily more expensive. He noted that there are certain protections guaranteed under a halal loan that don’t exist in conventional transactions. If there’s a loss—say, the home value depreciates—University Islamic Financial covers it. Halal financiers are more generous than conventional mortgage lenders when it comes to loan forbearance—that is, delayed or reduced payments to help buyers during hard times.

“Commercial banks foreclose on properties for not making payments,” Ahmed said. “UIF has been doing forbearance for 17 years. Why? Because Sharia [Islamic law] calls for it.”

State pilot program to help Muslim homebuyers ends after three years

To provide low-income buyers with down-payment assistance, Islamic lenders work with down-payment assistance programs that provide loans at zero percent—that is, no interest.

The need for alternative home financing increased after the state first saw an influx in the Somali population—including many refugees—in the 1990s. In 2009, Minnesota Housing, the state housing finance agency, created the New Market Mortgage program, a home financing product for any qualified first-time homebuyer in Minnesota. The program especially catered to Muslims who needed to avoid interest. 

The $15 million pilot program was developed over three years in collaboration with Minnesota Housing, the African Development Center, and Devon Bank, a Chicago-based Islamic bank.

African Development Center, an economic development organization in Minneapolis, acted as the mortgage broker, Minnesota Housing was the investor, and Devon Bank was the main service provider. According to Minnesota Housing, the program became the first in the U.S. in which a community-based organization like the African Development Center served as the lead entity and a state housing finance agency provided funding.

But the program only existed as a pilot, according to Kasey Kier, the assistant commissioner in the single-family division of Minnesota Housing. And very few loans got completed in three years because of a discrepancy between Devon Bank’s credit terms and the first-time homebuyer population the agency serves—low- to moderate-income homebuyers.

When the program ended, Muslims in Minnesota were left with very few options to afford a home the halal way. Down-payment assistance programs grant first-time buyers with low-interest loans. Because most programs charge interest, those loans have been out of the question for Muslim homebuyers.

“The only way a Muslim can benefit from the down-payment assistance, which is paid for by our tax dollars, is to do something that violates their faith,” Zaman said.

Sakan Community Resource, a Bloomington-based nonprofit that provides financial education and assistance, has tried to help Muslims in the Twin Cities establish financial stability. When Minnesota Housing’s pilot program ended, Sakan Community Resource picked up where they left off. The group created culturally responsive down-payment assistance programs for first-time Muslim homebuyers.

Johanna Osman, the executive director of Sakan Community Resource, said the group issued 17 down-payment assistance loans in Sakan Community Resource’s first fundraising year, 2017. “That went great—until we ran out of money,” Osman said. 

Sakan Community Resource offers up to $10,000 in loans for down-payment or closing costs at zero percent interest. Clients pay loans back after 30 years or when they sell the home. 

Community donations fund these loans. During the first round of fundraising, Sakan Community Resource received $182,000 in donations. The second round of fundraising started in 2019. Osman said Sakan raised $80,000 in donations, which Minnesota Housing matched. Since then, Sakan Community Resource has funded 16 down-payment assistance loans.

All down-payment assistance recipients also have to complete an approved financial wellness program and homebuyer education classes. Sakan Community Center offers these courses in English and Somali. During the pandemic, the organization hosted these courses virtually. 

“It is an enormous game changer, what we’re doing.” Osman said.

To qualify, the homebuyer’s household income must be below 80 percent of the area median income: $79,900 for a family of four in the Twin Cities. Buyers also have to finance their home through one of the three approved Islamic lenders that operate in Minnesota: Guidance Residential, Devon Bank, or University Islamic Financial. Sakan Community Resource has compiled contact information for local representatives from these lenders.

Sakan Community Resource has also compiled a list of real estate agents in the area that understand Islamic guidelines for buying a home. To qualify for this list, Sakan interviewed each real estate agent and connected them with Islamic scholars who explained the zero-interest mortgage process.

Osman and Zaman are both advocating for homebuyer support from the state of Minnesota. In February, Zaman brought the issue of home affordability and down-payment assistance to the state capitol during Muslim Day, a community outreach and lobbying event. But he said he hasn’t seen much progress yet from these conversations with elected officials so far. 

Osman noted that down-payment assistance in Minnesota is already difficult for most aspiring homeowners; the added Islamic guidelines make it even more complex.

As a broker at Guidance Residential, Mahamud said his customers are appreciative of the opportunity to buy a home the halal way. It’s why his business is growing. 

“Everybody talks about the American dream of home ownership,” Mahamud said. “Muslim Americans are no different. They want to build generational wealth for their families and that’s what motivates a Muslim person to buy a house—it’s what motivates everyone else.”

To better understand the barriers Minnesotan Muslims face when buying a home, Sahan Journal is asking for our readers’ help. Please take a minute to fill out our short questionnaire below. Your comments and questions will help shape Sahan Journal’s further coverage about housing issues for Muslims and immigrants in Minnesota.

Hibah Ansari is a corps member with Report for America, a national service program that places journalists into local newsrooms.