This is a tough job. Doing it tactfully, courteously, and kindly can help you avoid making people very angry. Because we turn down 4 of every 5 applicants, we have developed a way of breaking the news in a face-saving, gentle way.
Be honest but general. Remember the KISS (Keep It Simple Silly) rule. If it had to do with something on the credit report, tell them that there was a problem with their credit report. Don't go into specific accounts with them. If their current or previous landlord was honest enough with you to give them a negative reference, tell the applicant that there is a problem with their landlord that needs to be cleared up.
Sometimes the applicant was a good applicant, but there was another, better qualified applicant for example with higher income. Tell the applicant that you are declining, "I would love to have been able to rent to you, but there was another applicant that was a little better qualified on paper. Our policy is to choose the best qualified applicant so unfortunately, your application was declined for this property." Leave open the possibility of approving them for another property if you have one.
LEGAL NOTE: Any time a tenant is turned down for credit reasons, inform them in writing. Provide applicant(s) with a copy of their credit report if they ask for it.
As always, be careful not to illegally discriminate against any applicant due to their age, sex, religion, etc. When you're talking to a declined applicant, don't make any comments that could be construed as illegal discrimination such as: "That house is really better suited for people without children."
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