What is the ruling on a contract for selling a house from an Islamic bank in America with the following conditions: 1. The bank buys the house, then sells it to the buyer for a profit. 2. The value of the monthly installments is fixed, and in case of delayed payment, $50 is paid as administrative fees, not as compensation. 3. In case of inability to pay the installments, the bank gives the buyer one year to sell the house and pay off the remaining amount to the bank. If it is sold for less than the debt, they waive the difference. 4. The bank stipulates a down payment of 5% or 10%. Is this condition permissible? And must the contract be signed before the amount is handed over? And does their knowledge that the amount will be handed over before the contract invalidate its legitimacy? 5. The bank has the right to sell the contract to a third party (which may be an interest-based bank) with the condition of respecting the original contract terms? And can conditions be stipulated to them to avoid usury if these conditions are not Islamically valid?
It is not permissible to enter into a contract that includes a late payment penalty on installments, because the condition of a late payment penalty on a loan is considered usury (riba), which is forbidden, whether stipulated in advance or not.
Summarized from the full answer at Ftawy · reviewed Sep 2, 2026
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