What Is a Credit Union? The Key To Snagging a Low-Interest Mortgage

by Garcia Chris
6 minutes read
What Is a Credit Union? The Key To Snagging a Low-Interest Mortgage

When shopping for a mortgage, there’s one lender that home buyers often overlook: credit unions.

So what is a credit union? It’s a cooperative financial institution owned and controlled by its members—all of the co-op’s account holders and borrowers. This setup comes with some distinct advantages if you’re shopping for a home loan, as well as some limitations.

Here’s everything you need to know about credit unions so you can decide whether one would be the right lender for you.

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Credit union vs. bank: What’s the difference?

While getting a mortgage through a credit union is fairly similar to a bank, credit unions differ from banks in several ways. For one, you have to be eligible for membership. Credit unions are not FDIC-insured and instead are overseen by the National Credit Union Administration, a federal agency.

Also, unlike banks, being member-owned means credit unions are not-for-profits, and this can mean extra benefits for its members.

“The profits that are realized through the products are passed back on to the members with lower interest rates,” says Mark O’Dell, residential loan production manager at national credit union Alliant.

The benefits of credit union home loans

Credit unions offer a variety of benefits to home loan borrowers over traditional banks:

Lower mortgage interest rates and fees: It’s always a good idea to shop around for the best mortgage interest rates, and rates for most loan types tend to be lower at credit unions. That’s because they pass along any profits back to members, O’Dell explains.

According to the National Credit Union Administration, the interest rates for a 30-year fixed-rate mortgage averaged 6.96% at credit unions as of the end of December 2023, compared with 7.10% for banks.

For a mortgage, even a small difference in rate can make a big difference over the life of a loan. Credit unions also may have lower or no mortgage origination or processing fees, which can be about 1% of the total loan.

No private mortgage insurance: Some credit unions also offer members a product with no private mortgage insurance, or PMI, which some lenders require when borrowers make a down payment less than 20% of the home sale price. PMI is often added to your mortgage payment, so not having it could save you some money, up to 1% of your loan amount per year.

Credit unions also typically have a lower rate of mortgage defaults compared with banks, and are willing to assume any potential loss in the event of a default.

An easier application process: Specific terms vary from credit union to credit union, but many will accept borrowers with lower credit scores or require lower down payments. Some may allow first-time home buyers to put 0% down, compared with the up to 20% required by conventional lenders.

Credit unions might also offer more flexibility and personalization for borrowers because many credit unions keep loans in their own portfolios, rather than selling them on the secondary mortgage market.

“The process can be easier, honestly,” O’Dell says. “I think that comes down to the loan officer and the borrower working together.”

The downsides of loans through credit unions

One of the disadvantages of getting a loan through a credit union is that some are limited by geography and may offer mortgage products only in specific states, regions, or communities. Others, are national credit unions and will work with home buyers in most of the country.

That said, these national credit unions work mostly with members online, and usually don’t have a network of branches, so they may lack that face-to-face connection if that’s something you value.

Another downside? Some credit unions may not offer as many loan options as other types of lenders, such as USDA or VA loans.

How to qualify for a loan at a credit union

The mortgage pre-approval and application process is about the same whether you’re working with a credit union or other type of lender. However, credit union membership will be required to close on the loan. Membership eligibility varies by institution.

According to NCUA, you usually need to be within the credit union’s “field of membership,” or the common bond between members, like an employer or school, or if you have a family member who’s a member. Some credit unions require that you live or work in a specific area.

Despite these restrictions, it’s worth checking credit unions in your area, as they often are left out of a home buyer’s search.

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“The general public might think that credit unions may be unsophisticated or slow or behind the times a little bit, or only do car loans or credit cards,” says O’Dell. “And that’s just simply not the case.”

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