Reason is, that there are other events in life where that loan may be viewed under other legal requirements, in qualification for benefits, asset determinations, estate issues, law suits and other messes where a funny money loan cab be brought back or discounted with adverse effects if it is not made at arm's length.

According to the Fair Credit Reporting Act, if you deny an applicant based on information in their consumer credit file, you must send them an "adverse action notice".

The rent that he wants to get for his property is $600 but he adversities the property as $650 ( $50 late fee).

Suzette,I'm not sure how wise it is to take financial advise from a person that has significantly less money than you do - but I'll give it a shot.I tend to be more risk adverse than most folks on here seem to be so option 4 is very scary to me.

Buyer warrants that Buyer is not relying on any verbal representations concerning the Premises.9: Buyer is liable for all taxes, insurance and Homeowners Association fees from the date of closing of this contract. 10: Seller is responsible for all taxes, insurance and Homeowner’s Association fees up to Close of Escrow.11: Buyer warrants that the Buyer has disclosed to the Seller all information that may materially and adversely affect the Buyer’s ability to close escrow or complete the obligations of this Contract. 12: Changes: Buyer shall immediately notify the seller of any changes in the loan program, financing terms, or lender described in the LSR and shall only make and such changes without the prior written consent of the Seller if the changes do not adversely affect Buyer’s ability to obtain loan approval without conditions, increase Seller’s closing costs, or delay COE.13: Verbal discussions will not extend these time periods.

Estimates show as many as 20 percent of borrowers may now be “under water,†where their mortgage is bigger than the price of their home, Bernanke said. “Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy,†Bernanke said.

One of my biggest curiosities about people is how they handle adversity on an individual basis.

Hopefully $300-$480/yr won't adversely impact your financial future, making you destitute :)  Same goes for ROI. 

You don't need to say why, UNLESS the rejection was based on a consumer report (like credit report) in which case you need to issue an adverse action notice.

We intend to continue living in this home unless something adverse happens.