As if finding a mortgage isn't difficult enough, imagine if your faith forbade purchasing a house with an interest-bearing loan? For Muslims, this is the quandary in which they find themselves if they desire to finance or refinance a house.

The Qur'an forbids the payment of interest in financial transactions -- on both sides of the transaction, whether buying or selling. In effect, Muslims are unable to use the financing employed by most homebuyers today.

In 1975, a group of Canadian Muslims introduced a form of halal financing which enables an individual to purchase a house with a one or more other investors (shareholders) and then buy back the property over several years through a lease-to-purchase agreement with those shareholders. By leasing the property at or above the fair market value, a portion of the lease goes to the other shareholders for rent, the remaining is then used to purchase back shares of the house for the homeowner.

This way, the owner-occupant (vs. non-resident investors) is able to purchase the house by paying rent instead of interest.

According to information from MSI Financial, one of the largest halal financing groups in the U.S., the first such transaction in Canada used documents much like any other mortgage. The document spelled out all details related to expenses and structured the purchase so that it was assumed that the investors were buying a property and renting it out for profit.

hus, the property taxes, insurance, and maintenance were considered qualified expenses while such incidentals as lawn care, snow removal and utilities were expenses to be paid by the tenant-purchaser. When compared with typical mortgages, the money paid by the resident owner is rental income for the use of the property and there is no interest.

With halal financing, the lender participates in such profit as the property may generate -- and also in any losses.

In essence, this form of financing is much like a shared-equity arrangement where an investor fronts money for a purchaser, who then makes payments back to the lender/investor. When the house is sold, the investor shares in the equity (or loss).

Financially, here's how it can work.

The buyer puts down 20 percent ($20,000 for a $100,000 purchase) and the investor puts up the remaining 80 percent ($80,000). The buyer now pays an agreed upon amount of money to the investor to for lease/purchase, based on a fair-market rental. This investment is then amortized over several years. As each year passes, the investor and buyer review the fair market rent, then the buyer pays that amount for the next year. Also, as each year passes, the tenant-purchaser increases his or her share in the property until eventually he owns 100 percent.

Halal financing is used for more than just home purchases. Interest-free loans can be used to finance a car, business or to refinance an interest-based mortgage.

For buyers who seek such financing, there are a number of informative sources online:

• Mortgage Resources, San Jose, CA -- Offers financing for mosques and schools.

• LARIBA

• Islamic Co-operative Housing Canada

• IslamiQMoney.com

• Is There A Halal Mortgage?

• Al-Tawfeek Company for Investment Funds Ltd.

• MSI Financial Services

• Kuwait Finance House

• The International Investor

M. Anthony Carr is a Washington-based author who has written about real estate issues for more than a decade.

Published: July 24, 2001

Use of this article without permission is a violation of federal copyright laws.

Mr. Carr is an award-winning real estate broker in Northern Virginia and authored "Real Estate Investing Made Simple: a commonsense approach to building wealth." He also contributed to Donald Trump’s book, "The Best Real Estate Advice I Ever Received," and is an active trainer and coach of top producers in the Washington DC market. As a sought-after expert on real estate, Mr. Carr has been featured on CNN, various broadcast outlets and was the former real estate editor for The Washington Times. He accepts questions at his blog www.RealEstateOlogy.org.