Credit unions are member-run financial entities that offer the same kinds of products and services as banks. Some lenders, including credit unions, require you to purchase private mortgage insurance when you take out a home loan. You can often avoid PMI on credit union loans if you make a large down payment or if you take out an in-house loan.
Private Mortgage Insurance
Credit unions and banks sell mortgages to investment firms, including government-backed entities such as Freddie Mac and Fannie Mae. These firms convert residential loans into marketable securities by creating bond funds that contain thousands of different mortgages. Investors receive regular bond payments that are funded with cash from your monthly principal and interest payments. If you default on your loan, your lender can foreclose on your home and some of the sale proceeds are passed onto the investors holding bonds that are tied to your loan. To protect investors from foreclosure related losses, mortgage investment firms require borrowers to make 20 percent down payments or buy PMI. If your home sells for less than the balance of your loan, PMI covers some of the investor's losses.
Credit unions and other lenders use real estate appraisals to determine the current market value of your home. PMI requirements apply to both purchase loans and refinance mortgages. If your home drops in value, you may have to buy PMI when you refinance your home if the loan amount exceeds 80 percent of the property's current value. Conversely, you can cancel PMI on an existing loan agreement if rising real estate prices mean that you currently have more than 20 percent equity in your property.
While credit unions sell many loans to investment firms, some mortgages are kept in-house. These loans provide credit unions with recurring monthly income. Guidelines relating to PMI do not apply to in-house loans, because no investors are involved in the equation so each credit union can establish its own underwriting requirements. In-house loans are often referred to as portfolio loans. Some credit unions offer 100 percent financing with no PMI. Other guidelines relating to income or credit scores are often more relaxed than on other types of home loans.
Credit unions are not-for-profit entities that are chartered at the state and or federal level. Every credit union has strict membership guidelines and you can can only apply for a mortgage if you qualify for membership. Some credit unions offer services to employees of certain firms, while others provide services to people who live in particular areas. Credit unions use deposited funds to finance mortgages. Consequently, a credit union with a large deposit base can write more portfolio loans than one with a very limited membership base. You may qualify for membership at more than one credit union, in which case you can shop around for non-PMI loans.