Working With a Loan Broker

The September 2003 Michigan state appeals court decision Robert H. Roether v. Worldwide Financial Services offers an example of how important pre-approval letters can be. And how much trouble can come when a borrower doesn’t manage his credit well.

Robert Roether and his wife lived in West Bloomfield, Michigan, and wanted to buy a condominium in nearby Ann Arbor. Roether knew Howard Eisenshtadt, a mortgage broker with Worldwide Financial, socially; their wives worked together. Roether contacted Eisenshtadt in April 2000 to help get a mortgage for the condo.

Eisenshtadt gave the Roethers and their real estate agent a preapproval letter for a loan of $225,000 from Worldwide Financial. According to the language of the letter, it was a conditional offer of preapproval for a loan and was not a contract or actual approval for a specific loan.

Eisenshtadt claimed he issued the certificate because he knew the Roethers well and knew Robert Roether was an attorney in solo practice.

Roether’s version was that Eisenshtadt had issued the preapproval letter on the basis of a credit report and not on merely on their social relationship. And Roether pointed out that his credit report was pulled the day before the certificate was issued.

When Eisenshtadt reviewed the Roethers’ credit histories, he realized there were going to be problems making the loan. The Roethers had been a late on mortgage payments several times; and they owed a lot of money to other creditors (including large balances with several credit card companies).

The Roethers disputed Eisenshtadt’s characterization of their credit and claimed that their financial situation qualified them for a mortgage loan of $265,000 in addition to their West Bloomfield mortgages of $250,000.

Worldwide Financial didn’t agree. Eisenshtadt told the Roethers that they would have to use the “stated income” method of applying for a mortgage, which required a larger down payment and meant a higher interest rate. He suggested that they make the application only in Robert’s name because a lot of the credit card debt was in Barbara’s. And, even with these changes, Eisenshtadt suggested that Robert pay off some of his credit card debt to improve his credit score.

Eisenshtadt and Roether agreed that the Roethers should consolidate the two mortgages on their West Bloomfield home in a refinance package—and use some of their equity to pay off certain creditors, a list of which Eisenshtadt gave Roether.

While they were taking these various steps to clean up their credit, the Roethers signed a contract to purchase the condo in Ann Arbor. Roether claimed he faxed Eisenshtadt a copy of the contract on the condo on April 14, 2000. Eisenshtadt didn’t recall receiving anything like that so early on.

The Roethers closed on their consolidation refi on April 28, and received the resulting cash from Eisenshtadt personally on May 3. When he gave the Roethers the money, Eisenshtadt repeated the list of creditors that needed to be paid with the funds in order to raise their credit scores.

Eisenshtadt claimed that he first learned about the contract on the Ann Arbor condo on May 9. He began the loan process but didn’t send the application until nine days later. In the meantime, he got an updated copy of the Roethers’ credit report. It showed that they had used the funds from the refi to pay off Barbara’s individual debt instead of the list of creditors suggested by Eisenshtadt.

The Roethers were looking for a 90 percent loan on the Ann Arbor condo. In Eisenshtadt’s opinion, it was nearly impossible to find an investor for that loan with the Roethers’ credit scores. He mentioned his concerns to Roether, who said he could raise his down payment to 15 percent. Eisenshtadt still couldn’t find a lender for the Roethers in time to complete their contract. The offer fell apart and the Ann Arbor condo was sold to someone else.

Roether sued Eisenshtadt and Worldwide Financial, alleging claims of misrepresentation, breach of fiduciary duty, Michigan Consumer Protection Act (MCPA) violations and breach of contract.

The trial court didn’t think much of Roether’s case. It ruled that Eisenshtadt’s “preapproval certificate” did not contain a promise for a specific loan in part because no terms of the loan were specified in the certificate. And it rejected Roether’s other claims.

He appealed. But the appeals court didn’t think any better of his suit. It wrote:

Our review of the certificate comports with the trial court’s reasoning. The plain language of the certificate itself demonstrates it was not a contract for a loan; instead, it was a conditional offer of a loan.

The appeals also rejected his other claims.

It’s important to understand the limits on a pre-qualification letter. You may need to find a better loan quickly, if your broker can’t come through with the terms he or she mentions at first.

Next: Home Loan Mechanics