Mortgages & Credit Unions

In a time of tighter underwriting standards and declining home values where can a person turn for options when their current mortgage lender or bank is saying no? How about your local credit union?

Haven't you thought about this option before? You're not alone. Roughly, only 2% of all outstanding first mortgage loans are held by credit unions. There are a number of reasons for this:

1) A good portion of credit unions (44% see last section of article) do not even offer mortgages.

2) In the past, you also needed to "qualify for membership" which could limit which, if any, credit union you could establish a relationship with. Today, many credit unions offer "community charters" which allow membership to those that live, work, worship, etc, in a particular geographic area. This makes membership much more attainable.

3) Those credit unions that do offer mortgages are simply not the first choice for many borrowers as they do not advertise as heavily as some of the larger banks such as Wells Fargo or Countrywide/Bank of America.

Credit Unions at their very heart were created for low to mid income individuals in mind. Credit Unions are owned by their membership. They are not worried about boardrooms and stock price as banks tend to be. Credit Unions are worried about service and relationship.

What does mean for you and your mortgage? It means that your relationship could outweigh other financing hurdles that you may be facing with another bank/lender. The deeper history that you have with a credit union, the more likely a credit union will take a chance on you.

3 factors that Credit Unions will look at beyond just your credit score:

1) Do you use them as your primary institution? If you do and if you have direct deposit of your income.

2) Have you had loans in the past? Have you paid those loans on time or worked with the credit union in times that you were struggling financially?

3) What is the story to why you are refinancing? Has your family made a bad financial decision and didn't think of the consequences? Young and unresponsible? Medical bills? Death? Divorce? Kinda sounds like FHA doesn't it? But if your story makes sense, a credit union can help you also.

Now, it may not mean that you will get into that 30 year fixed rate mortgage that you hoped for. If a bank/mortgage lender is having trouble getting you qualified for a traditional 30 year fixed rate mortgage, a credit union is going to have a similar issue. But their may be alternatives. Maybe the credit union will do another ARM but with a longer initial period, such as 5 years or more. A number of credit unions still offer balloon mortgages which may make sense.

The credit union where I work (yes, I'm biased. But I have worked for mortgage lenders in the past) offers a 10 year balloon. What this means is that your payment would be a 30 year term, giving you the payment you're looking for, but it requires that if you have not refinanced, sold, or paid off the home at the end of 10 years the remaining loan balance comes due and you would be required to refinance at that time at current rates. Who knows what rates will be 10 years from now? But you have 10 years to work it out. That gives you plenty of time to get your credit where it needs to be, wait through rate cycles if you need, and the rate doesn't change throughout that term. Not a bad "short term" solution.

Another credit union in my market offers a 15 year balloon that can be converted into a fixed rate mortgage (at prevailing rates) at that time or another balloon term extended for 5 years for a small fee.

The point is, credit unions are more willing to be creative to help you find ways to afford your home without making you "home poor". And when you have issues paying on your mortgage, credit unions are much more willing to work the situation out.

Now, there is no guarantee that your credit union is going to be able to help you out in every situation. There is only so much risk that they are willing to take. Credit Unions will not fill the gap in subprime loans. Credit Unions overall did not get involved in subprime loans and as such their loan performance reflects in their deliquency rates, foreclosures, and workouts (this is a small sampling from California).

If your home is still affordable in your budget and you have an established history with a credit union (and even if you don't), call them and see what options they may have available to you. What do you have to lose?

Subprime is Gone, FHA, and Credit Unions

I work for a very small lender (credit union) at this time. We deal in only conventional financing with the two GSEs Fannie and Freddie. Anything else that we do that does not meet Fannie or Freddie guidelines are placed into our portfolio of loans. What does that mean to the average person? For one, it means that we have not done "subprime" loans. Every loan we do has the idea behind it...will the person be able to afford/pay us back.

Now before I worked at this credit union, I worked at Waterfield Mortgage, which was in turn bought by American Home Mortgage. Sound familiar? Yes, American Home Mortgage blew up just a couple months ago. I have a good idea what types of loans were being made in the market.

I have recently went to both the Indiana Mortgage Bankers Association annual meeting and the Northeast Indiana Mortgage Bankers associations meetings. What just stunned me in my tracks is how other lenders spoke about subprime lending. They talk about that it is gone. Just absolutely gone. Not that you can, "still do this or that," but just not available anymore. What a change in just a few months time!

Now all the lenders are trying to pile into FHA financing for their needs. Many lenders loving refer to FHA financing as "government subprime". It is somewhat true. Deliquency rates on FHA and subprime loans run about equal at just shy of 17%, but it is in the foreclosure rates where you see the big difference. FHA foreclosure is less than half that of subprime loans. Why is this?

For one, both FHA and subprime lending help those with less than perfect credit. FHA has no minimum credit score required. The difference really lies in the idea behind FHA. FHA is a "common sense" type of lending. The big question is, "Does it make sense?" and then document the snot out of it. Medical issues with documentation, interest rate increases (FHA Secure, even though many times you have to do a 203b instead) and any other documentable situation can be considered for FHA.

But make no mistake FHA is not subprime, nor will it ever be. FHA tracks lenders rigorously and make sure that they are making good loans comparable to other lenders in the same market. If a lender has a higher rate of foreclosures than the market, the lender comes under higher scrunity and possibly loss it's endorsement.

Subprime turned a blind eye to many issues. Self-employed? Do a stated income loan. How often did this happen? I skipped out on the last couple hours of the IMBA annual meeting because it was on "How to determine income from a tax return." No kidding. So many lenders got in the habit of placing individuals into loans of convenience such as subprime, stated income loans, no ratio, or no income no asset related loans that they had to spend time at the annual meeting either teaching those new to the industry to do it or remind the old timers how to do it again.

So what will happen to those who are facing rate resets, higher payments, and possible foreclosure to do? First, your their current lender and see what can be done. Ask to refinance. Ask to see if a loan modification is available (which will change the terms of your loan, such as taking an ARM and making it a fixed rate).

If these options are not available to you try refinancing with another lender. If you have a relationship with a credit union, it may be a good option when all else fails. Credit Unions value their members and if you have a long history with your credit union the more likely they are to make exceptions that other banks and lenders will not. If you're not part of a credit union, well frankly, you're probably paying too much for your banking services to begin with. Find one in your area. Most now have community charters that state if you live, work, worship, etc in their area, you can become a member. Not only will your banking services be cheaper. They can offer help to those who are loyal to them by being loyal to their members in times of need.