Answer
Wa `alaykum as-Salamu wa rahmatullahi wa barakatuh.
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
A Muslim is not allowed to get an interest-based loan to finance a project. However, some banks offer Shari`ah–compliant contracts and services through which a Muslim could finance his or her projects.
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
Of course, riba (usury) is haram (impermissible) as you know. What must be realized is that while lending for interest or any increment under any name is haram because lending itself does not create a new wealth (value) financing, though means other than lending are permissible and it is permissible to provide financing for profit.
In house finance, there are two ways that are permissible in Islam:
1- The finance provider may be asked to buy the house for cash and sell it to you for a higher price and deferred payment on installment. There are a few banks and finance companies in America which offer this finance.
2- The second is the same but they rent/sell to you on installment. So, each payment you make to the financer is divided into two parts; rent and payment to buy a small part of the house. The rent declines with time and the payment toward purchase increases.
For these, please, check the internet for names of banks and companies which offer these two contracts because they are commercial institutions and I cannot recommend any of them.
Allah Almighty knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.