The Best Ways to Deny a Rental Application

Going through the process of finding a valuable new tenant for your rental property is no fun.  However, just as there are proper steps to follow when vetting a prospective tenant, there are processes and legal requirements one must abide by when it comes to denying an application.   Read on to learn the best ways to deny a rental application.

Setting Yourself Up for Success

Let’s first start with some essential features of your vetting process.  Our free 10-page guide, How to Place Your Ideal Tenant, discusses finding and vetting a tenant but does not cover what to do if you have to deny an application.  One aspect of marketing your unit goes over how important it is for a landlord to create their qualifying criteria and ensure the applicants are aware of these criteria before paying a fee and completing your rental application.

Standard qualifying criteria would be:

• Good credit score.  For instance, set a parameter that you do not accept applicants with a FICA score below 675.
• No evictions on their record.  In addition to checking with consumer reporting agencies, always do previous landlord checks to double-check this.
• Clean criminal background check.  Making sure no illegal businesses or sex offenders are renting your unit is especially important to other tenants and neighbors.  You have a legal obligation to keep them safe.
• Minimum income level.  Commonly landlords use the rent-to-income ratio of 3, where income must be higher than rent by three times.
• Stable employment history.  Proof of employment with no concerns of job hopping brings landlords peace of mind.
• No smoking.  We do not allow smoking in or on our properties.  Ever.
• Pets.  This policy is where you would state accepted types of animals and potential size limitations.

Funneling Your Applicants

It is important that these criteria, in detail, are available to all applicants.  Your standards must be noted whether you supply them with the application, place it in your marketing, or include a link on your website.  Here’s why.  If you deny an applicant based on any of your criteria, you must be able to prove that it was adequately posted and available to all applicants.   Your criteria being available to all applicants is at the widest part of the funnel.

Next, we continue to narrow them down when we prescreen the prospects and directly ask five questions pertaining to our criteria.  They must agree that they meet these criteria before we even offer to meet them for a showing or provide an application.  Thus, by funneling the pool of potential applicants down, we do not have to deal with many applicants who likely do not qualify. 

We are very aware many landlords post their applications publicly for prospects to pay a fee and apply for the vacancy before having any interaction with this prospect at all.  While this can be a good way to avoid discrimination, it also can make for a lengthy response process if the landlord receives multiple applications.  Therefore, if we receive several applications,  our policy is that we do not retain the application fees for prospects we do not process.  That’s just bad business.

Our policy is the first qualified, and completed application gets processed.  We do not run multiple applications and choose our favorite.  That is a recipe for a discrimination lawsuit.  Instead, we process one application at a time.  If one is not accepted, we move on to the next qualified, completed application, and so on.   This policy allows us to avoid sending a bunch of Adverse Action Denial Letters to multiple applicants and opening ourselves up to a potential lawsuit if one of those denied applicants feels discriminated against.  Our application vetting process takes time to complete.  Having multiple applications open at once can confuse us, and we prefer to focus on one at a time.  Usually, we can accept the first applicant using this procedure.

Reasons to Deny an Applicant

There are several reasons why you might have to deny an application.   Obviously, there are grounds for denial if you process the application and they do not meet your stated criteria. 

Maybe they failed to let you know they do not have a previous rental history and do not have landlord references.  Possibly, you found their income does not quite reach the rent-to-income ratio you have set.  No matter the issue, the applicant must receive notification of the denial.

By law, per the Fair Credit Reporting Act, you must provide an Adverse Action Denial Letter if you have looked at an applicant’s consumer report as part of your screening process and are denying housing.  A consumer report is a paid background report for you to evaluate the following items:

• Credit Score
• Credit History
• Bankruptcies, Liens, or Judgements
• Criminal History
• Rental History
• Eviction History

The Federal Trade Commission (FTC) and the Fair Credit Reporting Act (FCRA) refer to the term adverse action in two ways.  One, it can apply to denying a rental applicant housing or deciding not to renew a lease agreement, should that decision be based on information in a consumer report.

They go one step further and require an adverse action notice (not a denial of housing) if the terms of the acceptance change.  For instance, you accept an applicant with one of the following conditions:

• Deciding to charge a higher rental rate than you would another applicant.
• Requiring a co-signer or guarantor on the lease.
• Requiring an additional or higher deposit amount than you would for another applicant.

So, if you have pulled a consumer report on an applicant and outright denied them on any of the terms above, you must provide an adverse action DENIAL LETTER.  On the other hand, if there are changes to the terms where the applicant has the power to provide additional information or monetary funds to get the application accepted, you would give an adverse action NOTICE.

Remember, The Fair Housing Act prohibits discrimination against the following protected classes:

• Color
• Disability
• Familial Status (for example, having small children or being pregnant)
• National Origin
• Race
• Religion
• Sex
• Marital Status
• Veteran Status
• Citizenship
• Sexual Orientation
• Political Ideology
• Gender Identity
• Age
• Participation in subsidy programs, like Section 8.

NEVER, EVER deny a tenant for anything pertaining to the above-protected classes!

Denial must be for lack of financial worthiness, negative previous housing experience, a relevant criminal history, or an incomplete application.  You must be able to prove these reasons, so make sure you take detailed notes.

Notification of Denial

As mentioned above, you must send an adverse action denial letter if you determine the denial decision is primarily from information in a consumer report.   Per FCRA, you can notify an applicant orally, in writing, or electronically.  It is important to remember that where an oral explanation is allowed, we do not recommend it.  The applicant can claim no denial notification, which becomes a “he said/she said” situation in court.  We recommend emailing the applicant as it is timely (allowing them time to apply elsewhere), and it is date and time-stamped for legal reasons.  Below you will find what information you are required to provide depending on the reason for denial.

Adverse Action for Lack of Credit Worthiness

This notice tells the applicant they were denied due to information found on a credit report.  You must provide the following:

• The name and contact information of the credit reporting agency.
• A statement that the credit reporting agency did not make the final decision of denial and cannot give reasons for the decision made.
• A notice that the applicant can dispute the accuracy of the report.
• A disclosure that the applicant can get a free copy of their report if requested within 60 days of the denial.

In addition, you should also include a PDF or a link to your stated qualifying criteria.

Adverse Action for Criminal Background

Note: It is illegal to deny an applicant based on arrest records.  You must have proof from a criminal background report or eviction search. 

You must provide the applicant with instructions on how they can obtain a copy of the report by providing the agency used and who to contact to get a copy of it.

Adverse Action for Other Consumer Report

As with credit and criminal reports, you must provide an explanation of denial and the name of the reporting agency with contact information.

Denial for Reason Other Than on a Consumer Report

Technically, the only difference between your notification for this instance and the ones above is that you are not providing a consumer reporting agency’s name and contact information.  Therefore, even if you deny for a reason, such as the applicant claims they don’t smoke, but the previous landlord states they do, and personal references confirm the applicant is a smoker, you should still send an adverse action denial letter. 

While most landlords are not discriminatory, the laws are in place to protect renters from those who are. Therefore, sending an adverse action denial letter is crucial to avoid legal issues.  In addition, there is a condition by the FHA known as Disparate Impact. 

Disparate Impact refers to those actions that aren’t necessarily meant as discrimination but have the same effects as discrimination.  For instance, if your rental criteria included such terms, you will not rent to people with jet-black hair or nose piercings.  This concept is considered disparate Impact.

It is also essential to know your state and local laws regarding renter protection, so you do not unknowingly deny an applicant for something they are protected.

Lastly, it is important to keep your notice professional and concise, with an explicit explanation of the legal reasoning behind your denial.

Check out our other blogs to guide you on your self-management journey as a landlord:

Beyond The Fico Score, How to Read an Applicants Credit Report

How and Why Landlords Want to Create Standard Operating Procedures for Their Rental Property Business

Marketing Your Property: Get to Know the Neighborhood

Tips for Taking Great Rental Property Photos

10 Things Tenants Need To Know From Landlords When They Move In

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