Do credit unions provide bad credit mortgage financing?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I have bad credit scores (under 600) but have been paying my bills on time for the last year. I also have been with the same company for years, my income is really good, and I've saved a lot of money in my credit union. Would it be possible to get an FHA mortgage if I put 15 percent to 20 percent down? - Sadie, Minnesota

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Dear Sadie,

Your best shot at a mortgage might be staring you right in the face. You say you have a lot of money in your credit union account. Have you applied for a mortgage with them?

Many mortgages made by credit unions are kept in their own portfolios and not sold to investors. That means credit unions can play by their own rules -- and have not had to tighten their underwriting standards like other lenders in recent years.

Credit union mission

Credit unions are not-for-profit co-op organizations designed to serve their members (that means you!). They won't take crazy risks with their members' money, but they do approve mortgages when it makes sense to do so. The fact that they can look at your account during your years of membership and see regular deposits is a plus. Members who are well known to the credit union and have belonged for a long time get a bit of extra leeway when applying for mortgages.

Not subprime institutions

Many credit unions have expanded their underwriting guidelines, making them more flexible than for-profit lenders. However, they aren't traditional bad credit mortgage lenders. You won't see high loan-to-value home loans for people with bad credit, but you may be approvable with a good explanation for your bad credit, low debt-to-income ratios, a good recent payment history, and ample savings for a down payment. Plan on putting at least 20 percent down because mortgage insurers won't approve you if you have a poor credit score.

Not all credit unions fund mortgages

Hopefully, your credit union funds purchase mortgages -- while many credit unions make second mortgages or home equity lines of credit, only about 3,500 of the country's 8,000 credit unions fund first mortgages. If yours isn't one of them, or if you get turned down, your next best bet is an FHA mortgage.

For bad credit, FHA loans are a reasonable choice if you have a good-sized down payment. Credit scores of less than 580 may be accepted if you put at least 10 percent down, and more is better. I recommend that you get your credit report from annualcreditreport.com and purchase your scores before talking to lenders. You can find lenders here by filling out the form on this site.

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