Mortgage Eligibility with Restricted Stock Units (RSUs)

If you work for a big company or a burgeoning startup, you might be earning part of your overall compensation from Restricted Stock Units (RSU).

That’s all well and great, but you might be wondering how this alternative form of income affects mortgage qualification. In all honesty, it could be a challenge. 

You’d be surprised to find that even though compensation in the form of RSUs has become increasingly common, there are no standard guidelines around how lenders should deal with these. 

This means that your choice of lender alone will have a significant effect on the size of the loan you’ll be able to get. Whether this is more buyer power and a lower mortgage rate, or the exact opposite. 

It’s worth mentioning that some mortgage lenders don’t consider RSUs as qualifying income at all. And the ones who do, however, have strict requirements around who can qualify for a loan. In this article, we’re going to dive deep into RSUs, including:

• What Restricted Stock Units are and how they work.
• What you need to qualify for a mortgage with RSUs.
• How mortgage lenders calculate your RSU income.
• RSU-related restrictions that prevent mortgage lenders from giving out loans.
• Some extra tips for how to qualify for a mortgage with RSUs.

Additional read – Jumbo Loans: A Powerful Tool in a High Priced Home Market

What is a Restricted Stock Unit (RSU)?

Restricted Stock Units (RSU) have become quite popular in employee compensation plans for big companies, especially those in the tech sector. 

With bonuses, employees are typically rewarded with extra cash on top of their regular salary. But in the case of RSUs, employees get stock shares in the company they work for. These RSUs can be rewarded based on you working at the company for a predetermined amount of time, or for you hitting some predetermined performance goals.

There are two main mechanisms that define how RSUs work, the grant date and the vesting period. The grant date is the date when your company officially gave you a set of shares. You don’t actually get anything at this point, the grant date simply represents an agreement to pay you those shares at a future date.

The vesting period, on the other hand, is how long you’ll have to wait before you have full ownership over (or vest) those shares. The vesting period varies by company, but it could be anywhere from 6 months to a couple of years. 

When it comes to vesting types, your RSU will either vest in portions (AKA grading) or best all at once (AKA cliff). For example 50% in half a year and the other 50% after a full year. Once the stocks have vested, however, you’re free to sell or keep them as you please. 

Just keep in mind that selling RSUs is a taxable event. If you sold your RSUs before they vested or less than one year after they vested, then it’ll be taxed as regular income. If, on the other hand, you sell your RSUs more than one year after they’ve vested, then it’ll be taxed as long-term capital gains.

Qualifying for a Mortgage with RSU Income

Two main factors determine mortgage approval: your credit score and your debt-to-income ratio. But not all lenders will count the same forms of income toward your mortgage application. 

The income they do count is considered your “qualifying income”. Examples of these include your salary, bonuses, and investment income like dividends and rental income. Considering Restricted Stock Units is one form of compensation that is not always considered as qualifying income.

Lenders that don’t allow this are typically those that don’t work with many clients in the tech and finance industries, where those compensation packages are more common. But the mortgage lenders that do count RSU income toward your home loan will require you to meet certain criteria, such as:

• The RSU income might be issued from a publicly-traded company, meaning that the company’s shares are traded on a stock exchange. This automatically excludes RSUs from unlisted startups.
• The RSU must have been granted and vested for the past two years. In other words, you cannot use unvested RSUs as qualifying income.
• Vested and future vested RSU options are enough to support the amount used in your qualifying income for at least 3 more years.
• Your vested RSUs cannot be used for reserves once they are being used as qualifying income.

For proof of your RSU income, lenders will require you to present the following documentation:

• W-2 and tax returns for the past two years.
• Verification of employment form which includes your name, company name, and pay stubs for your RSU income and balance for the past 2 years.
• Your RSU Award Agreement, which shows the vesting schedule plus terms and conditions for the next 3 years.

All of this documentation could be requested from your HR department. These requirements could vary by lender though, so it’s always best to consult with mortgage experts to get a personalized breakdown.

Another thing to note is that qualifying for RSU income does not necessarily save you from having to make a sizable down payment. At the end of the day, because RSUs are stocks and stocks can be volatile, you should put anywhere from 5% to 20% down. Mortgage lenders also will not allow RSUs to account for more than 35% of your qualifying income.

How to Calculate RSU Income

Underwriters are the people who review loan applications to decide whether you qualify. These underwriters are conservative when it comes to calculating the value of your RSUs. Why do they do this? One reason: they want to avoid putting you at risk of default by granting you an RSU valuation that turns out to be too high in the future.

Three factors that are taken into account when calculating your RSU income:

• Your RSU income over the past 2 years.
• The amount of RSUs that are due to vest in the next 3 years. For this, underwriters will assume that you will vest the least amount of RSUs.
• The historical stock performance of your employer for the past 2 years.

Here’s a straightforward explanation of how the RSU calculations are done. The underwriter will take the amount of RSUs you’re due to receive in the next 3 years and divide it by 24 months to arrive at your hypothetical monthly income from RSUs. 

Here’s the kicker though: The value of your shares will vary according to your company’s stock prices. How can they value your RSUs if it’s changing value by the second? To smooth out this volatility, lenders typically tie the value of your RSUs to your company’s 52-week average stock price.

Let’s illustrate this with an example.

You make $100,000 in salary and with a grant of 5,000 RSUs that would become vested after 3 years.

When you apply for a mortgage, the underwriter would take the 52-week average stock price of your company. In this case, it’s $20. This means that your monthly RSU income is 5,000 x $20 / 24 months = $4,166. 

Your qualifying income, then, is $100,000 (salary) + $50,000 (1-year RSU income) = $150,000. 

Mortgage Lender Restrictions on RSUs

Here are a few cases in which lenders will restrict the use of RSUs as qualifying income:

• If your company is experiencing financial troubles and/or poor stock performance.
• The example illustrated above is a simplified case. Some underwriters will not use the full value, but only use 75% of the current stock price to value your RSUs.
• Certain lenders will require you to sell your RSUs for cash to use them as qualifying income.
• Lenders typically only accept RSUs from you if you’ve worked at a given company for at least 2 years.
• RSUs from a relatively new company will likely not be approved, regardless of whether the company is publicly listed.

6 Tips for Mortgage Approval with RSU Income

Here are a few quick tips for using RSUs in your home loan:

1. Compare your lender options: As we’ve mentioned throughout the article, not all lenders accept RSUs as qualifying income. But even those who do calculate it in different ways. This can lead to huge differences in your home loan amount, which is why you should take the time to shop around. 
2. Leverage your bonus income: If you feel like your RSU income is lower than what you expected, here’s another way to increase the size of your home loan: use your bonuses as another form of qualifying income. As long as you have a regular history of bonuses for at least 2 years, lenders will likely accept it.
3. Make a big down payment: Lenders will feel safer to use your RSUs as qualifying income if you make a down payment of at least 20% for your home.
4. Build a cash reserve: You’ll have higher chances with lenders if you still have money left over in the bank after your down payment.
5. Have a high Credit Score: Lenders might require you to have a credit score of at least 640 or more for them to consider your RSU as income.
6. Lower your debt: The less debt you have, the more willing a lender will be to work with you. 

Do Your RSUs Qualify for a Home Loan?

Receiving Restricted Stock Units as part of your compensation has its benefits. Paired with the right lender, you will increase your buying power and be able to afford more house than you thought. 

But keep in mind that all lenders have their own requirements and restrictions, which you should become familiar with before signing with any. If you need the guidance of experts who can help you qualify for a mortgage with RSUs, then contact A and N Mortgage today!

A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.