You’ve saved up your money, you found the perfect house, and you’re ready to buy. Now you just need a mortgage. Commercial banks may be the obvious choice, but they aren’t the only option for your mortgage. Mortgage brokers, online mortgage lenders, and credit unions also originate mortgage loans.
Credit unions and other non-banks are gaining in popularity for mortgage originations. In fact, credit unions accounted for 9% of all mortgage originations in 2017. If you’re ready to take out a mortgage on your dream home, here’s what we think you should know about credit union vs. bank mortgages.
The Advantages of Getting a Mortgage through a Credit Union
Credit unions operate like banks, but they are non-profit organizations with specific membership requirements. Members of the credit union are the collective owners of the union, offering some distinct advantages for mortgage origination. Credit unions may offer lower rates, easier approval, greater personalization, and more. Here are four advantages of working with a credit union vs. a bank for your mortgage.
In general, credit unions are more likely to lend to people with poor credit scores and offer options for smaller down payments. Credit unions are also more likely to hold onto the mortgages they originate, rather than selling them like banks often do. When a bank sells a mortgage, outside investors drive the interest rates and underwriting standards, limiting the bank’s flexibility with mortgage terms. When credit unions don’t sell mortgages, they can be more flexible with who they loan to and what rates they offer.
In addition to having more flexible qualification options, credit unions prioritize customer service—not profits. They want to help their members find the options that work best for them, their community, and the credit union membership as a whole. Plus, if you’re already a member of a credit union, it’s generally easier to get additional services through an institution you already have a relationship with. You may even be pre-approved for a mortgage based on your prior account activity.
Because credit unions are exempt from paying federal taxes and prioritize breaking even, not making a profit, they can offer higher interest rates for deposits and lower interest rates for loans.
Overall, credit union rates tend to be lower for all loan types, including credit cards, but rates for mortgages may be similar to those from traditional banks if they sell their mortgages. Even a small difference in interest rate can make a big difference over the life of a mortgage, though, so any little bit helps.
There are many unavoidable costs of taking out a mortgage: closing costs, vendor fees, insurance. Many banks and mortgage brokers will also charge origination fees and other processing costs. Because credit unions are less concerned with turning a profit, originating a mortgage with one will often result in fewer origination fees and other processing costs. These reduced fees can potentially save you several hundred to several thousand dollars.
Credit unions prioritize customer service for their members. Banks, on the other hand, are primarily motivated by profits. You may get a better, more personalized experience by working with a credit union to originate your mortgage. Because credit unions more often hold on to their mortgages, you’re more likely to work with them for the life of the loan. They also often offer special rewards programs and incentives for first-time home buyers or no-down-payment plans.
Depending on the credit union you’re a part of, it may also be better able to provide specific advice and context for loans. For example, credit unions specifically for veterans may have more hands-on expertise with VA loans. Similarly, geographically based credit unions may have better understanding of local incentives for mortgages.
During times of crisis, like the coronavirus pandemic, credit unions may be more attuned to the needs of their customers and therefore more likely to offer financial hardship support. Reach out to your credit union if you need support or resources.
The Disadvantages of Originating a Mortgage with a Credit Union
Because credit unions are smaller, membership-based organizations, there are some disadvantages to working with one for your mortgage. Here are five things to keep in mind if you’re considering a credit union vs. bank mortgage.
While traditional banks open accounts with anyone who qualifies, credit union memberships have additional specific requirements and limitations depending on the union. If you do not meet those requirements, you cannot originate your mortgage with that credit union, even if it would be the best deal for you. You can find credit unions in your area that you may qualify for using CUlookup.com.
Credit unions are smaller and often more geographically limited than national banks. That means you’ll have fewer options for in-person service. In fact, credit unions have an average of three branches while most banks have an average of 16. Many credit unions still operate traditional banker’s hours—9 a.m. to 3 p.m., Monday through Friday—as well, limiting your options for service.
Online services are becoming increasingly important to consumers who require and expect quick and easy self-serve online options. Credit unions are generally behind the times when it comes to technology, which means you may not be able to use an app or find other self-serve options online if you have questions. They are quickly catching up to traditional banks, though, so this may not be much of a disadvantage moving forward.
Limited Financing Options
Banks and credit unions fund mortgages and other loans with cash on hand and borrowed from other institutions. In order to lend more money to members, they must have more money available. Because credit unions typically have a smaller customer base, they tend to have less cash on hand to loan out, which may curtail loans available. Banks are, on average, 13 times larger than credit unions with $2.6 billion in assets vs. $207 million in assets for credit unions.
The FDIC does not cover credit unions. Instead, the NCUA regulates federally insured credit unions and provides similar insurance coverage as the FDIC. Some credit unions are state chartered, however, and may be covered by a state agency or offer private insurance coverage instead. Private insurance is held to same regulatory standards but is generally considered less secure than federally chartered coverage. The NCAU Credit Union Locator can verify whether a credit union is federally chartered.
While the type of insurance an institution uses does not directly affect the terms of your mortgage, it should still be part of your consideration process for working with a credit union over a bank.
Credit Union vs. Bank Mortgage
When you’re ready to take out a mortgage, you have a lot of options. Like with other financial decisions, you should shop around across credit unions, banks and other lenders to find the best deal for you. And if you’re not getting the rate you think you deserve, working to improve your credit score is one of the best ways to increase your chances of getting a competitive mortgage rate.