Updated December 15, 2022
When you are looking for a new mortgage, there are several loan providers. Oftentimes, however, the choice will generally come down to one of three: a traditional bank, mortgage brokers or a credit union. We will introduce the differences between banks, mortgage brokers and credit unions, and in the end, you will see how the advantages of credit unions mean they are likely the best choice for you when you want to obtain a jumbo loan.
Credit Unions Are Nonprofit
Credit unions are similar to banks in that they accept deposits, provide loans and offer other services. However, the most significant difference between banks and credit unions is that credit unions are nonprofit, cooperative institutions set up to serve their members. The credit union’s members receive the benefit of this structure by having a safe place to borrow at lower rates for loans and saving with higher rates paid for their deposits. Banks have shareholder owners who are looking to make profits from the bank’s operations.
Mortgage brokers will work with borrowers to find good deals on loans (usually from banks or other financial institutions). However, brokers are third-party middlemen and, therefore, add an additional fee for their services on top of the lender’s profits. The shift from for-profit to nonprofit changes the focus from appeasing shareholders with profits to providing better customer service and returns for the members. Why a Credit Union Could Be a Better Deal Than a Bank
Credit unions put their members first while banks are focused on the shareholders, and mortgage brokers have their own interests in mind. If you have an account with a credit union, you are a member of the credit union, which means you are a part owner of the organization. This results in procedures that are considered more customer-friendly. Credit unions have rules that are usually more forgiving and provide loans to borrowers with lower credit scores. They also attempt to provide solutions if borrowers fall into difficult financial situations.
The biggest difference that the credit union structure has is that fees and interest rates charged for loans will generally be lower. One of the places that banks make profits are with their fees. Loans, monthly service fees and origination fees are profit drivers. The fees assessed by credit unions are generally lower than fees assessed by banks. Other eliminated or reduced banking fees can also add up. For instance, lower or no transfer fees, no ATM fees and reduced overdraft fees, which can be very big with banks, can be a significant source of savings for the credit union member.
Being nonprofit and only having to cover their operating costs, credit unions can usually provide lower interest rates on their loans, including jumbo loans. Borrowers may also have discounts applied for setting up automatic loan payments. Combined, these discounts mean members can save significant amounts over the life of a mortgage.
Credit Union Jumbo Loans
Jumbo loans are loans that exceed the maximum loan limits set by Fannie Mae and Freddie Mac. These limits are set every year, and for 2023, the limit for the majority of the country is $726,200. However, other areas exceed this amount, and there is a map available that shows the maximum loan amounts for the entire country. Fannie Mae and Freddie Mac purchase loans from lenders that are below this limit, and if they don’t conform to the rules of Fannie Mae and Freddie Mac, they are called nonconforming or jumbo loans.
Because jumbo loans do not have to conform to the set rules, there are more options a credit union can provide as your lender. The term of a conventional jumbo loan can be 30 years or shorter if desired, and jumbo adjustable-rate mortgages are possible. ARMs are similar to fixed-rate mortgages, except they have a fixed-rate period for usually between 3 and 10 years, but 15-year ARMs are now available. The fixed rate for an ARM will be lower than a conventional loan, and then when the fixed-rate period expires, the rate will be related to the current market conditions and change on an annual or six-month basis.
Most of the time, a jumbo loan will be harder to qualify for than a conforming loan. Borrowers will usually need a minimum credit score of 680. The higher the score, the lower the rate you will receive for your mortgage. Most borrowers’ debt-to-income ratio, or DTI, should be less than 43%, but some borrowers will require a maximum DTI of 36%. Also, if you are supplying less than a 20% down payment, not only will you have to pay private mortgage insurance, but you may need to also supply a cash reserve of up to one year’s worth of mortgage payments.
If you have either very good or excellent credit, you may find the interest rates for a jumbo loan are lower than those for a conforming loan. Many lenders will keep jumbo loans on their books, not selling them, which makes loans for borrowers with high credit (a perceived lower risk) more competitive.
Lower Rates Mean Qualifying for More
Because credit unions charge lower rates for their mortgages, for the same monthly payment, you are able to purchase a more expensive home with a loan from a credit union. This provides you with more choices. If a seller is not willing to negotiate, you can still purchase the home with a loan from a credit union that you would not be able to afford with a similar-sized bank loan.
Streamlined Finances With Credit Unions
Credit union members have an opportunity to streamline their finances, and this can produce significant savings. Deposits made with a credit union have rates that are generally higher than bank deposits. The rates and fees (especially origination and monthly service fees) that are charged on loans will also be less, so borrowing from a credit union can be significantly cheaper. When this is combined with discounts from automatic payments, the loan process is both cheaper and easier for the credit union member.
Why a Credit Union Could Be a Better Deal Than a Bank
Having members as the focus of a credit union means their interests are considered first. This results in a better experience and a better deal for a mortgage than can be found at a traditional bank. Because jumbo loans have more flexibility, obtaining one through a credit union will allow for the superior service and rates of a credit union to shine through.
A jumbo loan is the perfect solution for higher-priced properties. And getting one from a credit union can give you more peace of mind.