In the United States, a conforming mortgage is basically a mortgage loan that conforms to GSE rules. The first and most famous rule is the total loan amount, which, for 2020, has been set at $584,100 for single family residences in the continental US only. Another rule states that the loan must be for a property that can be sold or rented. This means that a mortgage cannot be used to purchase a vacation home or an interest only home.
The second guideline is very important and it states that a conforming loan cannot contain provisions which allow the lender to decrease the principal balance due on the mortgage. Also, any adjustments to the interest rate or term of the mortgage must be clearly documented and justified. The third and fourth guidelines state that a nonconforming loan cannot include loans which are subject to acceleration under certain circumstances. This means that a borrower cannot get a mortgage if his credit score falls below a particular level. The mortgage lenders have to prove that these loans would be unprofitable to them and would result in bankruptcy. If they do not comply with these requirements, they are not allowed to sell any property at all or apply for Fannie Mae insurance.
The fifth and last guideline states that a conforming loan limit cannot be a balloon payment. A balloon payment is a payment which is payable in full at the end of the term of the mortgage but this is only applicable if the borrower has a lower fixed income. If the income of the borrower is higher than the fixed income, the loan amount will not be increased. This means that if a borrower has a one-unit income, he is not eligible for a one-unit increase in his mortgage.
Mortgage lenders are restricted by the federal Truth in Lending Act from using specific clauses to attract borrowers. In fact, even though Truth in Lending Act has stated that mortgage companies cannot charge unreasonable interest rates on mortgages, there are some mortgage lenders who still resort to such tactics to secure their business. It is also quite common for mortgage lenders to converse with a prospective customer about his or her credit scores. Such practice is against the law and constitutes mortgage fraud. Mortgage companies have to inform their clients about the federal Truth in Lending Act and the penalties involved in such activities. They are also supposed to give their clients information about their payment terms.
Even though the Truth in Lending Act specifies the criteria for a borrower to qualify for a mortgage, many people fall prey to subprime mortgage lenders. These are the mortgage lenders who offer mortgages to people who don't actually qualify for a home loan. People who applied for a loan but were denied could fall into this category. Mortgage companies are also known as bad-credit mortgage lenders and these are the ones who are often involved in predatory lending.
Conforming mortgages do not involve any excessive paperwork. A typical Conforming mortgage involves putting together a promissory note mortgage. Both the mortgage note and the mortgage can be presented to a lender if required by the lender. Conforming loans are usually short-term in nature, which makes them easy to qualify for. The mortgage rates charged by a conforming mortgage lender are usually low compared to conventional mortgage rates.
Fannie Mae and Freddie Mac are two different federal government programs that are designed to promote housing finance. Fannie Mae is the government's main housing finance arm and Fannie Mae is a sub-prime mortgage lender. Many people tend to get loans from Fannie Mae because of the reputation established by former Fannie Mae employees in Washington, DC. The sub-prime mortgage market collapse in September 2020 resulted in losses for many people who had taken loans from sub-prime lenders. Since then, the government has tried to encourage people to switch to mortgage-backed securities from sub-prime lenders.
Conforming loans are available to borrowers with good credit. Applicants who have bad credit will need to get a mortgage from a sub-prime lender and may need to pay higher fees and interest rates. Applicants who do not have good credit will still have access to mortgage-backed securities but their rates and fees will be significantly lower than those offered to applicants with good credit. If you need help getting a mortgage, try searching on the Internet. There are many free mortgage-related tools and information on the Internet.