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Is your employer offering restricted stock units as part of their compensation package?
Many tech companies like Amazon and Google pay employees partly through company stock. This type of compensation is referred to as paying employees through restricted stock units or RSUs. Typically when your employer grants you RSUs, you must wait for a certain period of time for the stocks to vest before they become yours. Once RSUs vest, they are considered income. Typically an employer will withhold some of the shares to pay taxes on that income. Once they are yours, you can sell and convert them to cash if you wish, or you can hold onto them.
Note: Stock options are different from RSUs. While an RSU may sometimes be considered as qualifying income, stock options will never be considered income by a mortgage lender.
When it comes time to apply for a mortgage for a home purchase, one logical question is: do my RSUs count as part of my income?
The short answer is yes. But there’s some fine print.
Your Lender Will Consider 4 Things To Determine If Your RSUs Will Be Considered As Income To Qualify For Your Mortgage
- The type of RSU matters: The RSUs must have been granted and vested (reported as part of your compensation income) for the past two years. One way to tell is: if your RSU was included in your W-2 Form and if you can sell it, that RSU has already vested.
- The percentage of RSU income versus total income counts too: Lenders prefer that RSUs not account for more than 35% of your income.
- The company issuing the RSU is a major determinant: Only RSUs issued by publicly traded companies would be considered income.
- You’ll need to present the vesting schedule for the next three years: Lenders must see how many RSUs will vest or become available for sale in the next three years.
How to Calculate RSU Income
The value of your RSU will depend on how much your company’s stocks are worth in the stock market based on recent sales of the stock. The share price may change several times a day depending on the supply and demand. Given the volatility of stock prices, lenders usually consider the 52-week-average stock price to compute your income from the RSU.
For example, if you received 300 shares in the past two years and the 52-week-average stock price is $12 when you apply for a mortgage, your monthly income from the RSU will be $150 (300 shares multiplied by $12 and divided by 24 months). If the RSU was distributed as a cash equivalent, the dollar amount will be used.
Meanwhile, other lenders may use 75% of the current share price as a conservative estimate of the value.
You’ll Need to Provide the Following Documents To Your Lender if You Have RSU Income
Evidence that the RSU is from a publicly traded company. Lenders can verify this information if your company’s shares are traded on a stock exchange.
Year-to-date pay stub showing your RSU distribution for the year
Tax Returns and W-2 for the past two years
Written verification from your employer providing information about your RSU income for the past two years. This document should include the balance of both, vested and unvested shares. Your lender may have a form that your employer can fill out
Vesting Schedule of an RSU agreement known as the Restricted Stock Unit Award Agreement. This document should outline the vesting schedule as well as the terms and conditions of the award for the next three years.
Some Tips for Getting Approved When You Have RSU Income
You will have a higher chance of getting your lender to consider your RSUs part of your income if you can put down at least 20% as a down payment for your home. In addition, lenders may also require you to meet a certain credit score of at least 640 or sometimes as high as 720 if you want them to consider your RSU income.
There Are Times When A Mortgage Lender Won’t Accept RSUs As Part Of Your Income
- Some lenders just don’t accept RSUs: While there are more banks and financial institutions accepting RSUs as part of your income, not all will. There are no standard guidelines to account for RSUs as income when you are applying for a mortgage.
- Most lenders value RSUs conservatively: Lenders like Wells Fargo, Chase, Bank of America, Citi and Union Bank recognize RSUs as part of the income but they often stick to a conservative approach in valuing these stocks.
- If your company isn’t doing well, the lender may eye the RSUs skeptically. If the lender has doubts about the financial situation of the company you work for or if the outlook for stock price performance is not positive, the lender may not want to consider the RSUs.
- You might have to sell: In some instances, you may also have to convert RSUs to cash in order for a lender to consider them as income. Typically, your lender will tell you if they insist that you do this.
- Tenure matters: If you have worked for your current employer for fewer than two years, your RSU may not be considered income. You may also have difficulty getting the RSUs considered as income if you are working for a newer company.
Use Caution: Risks of Using RSUs As Part of Your Income When Applying For A Mortgage
If you were counting on using your RSUs as part of your income but find out that your lender won’t accept them, it may impact the size of the mortgage you are approved for or your interest rate.
Planning Ahead When You Have RSUs Is Key
Receiving RSUs as part of your compensation has plenty of advantages and for some individuals, it is a large portion of their compensation.
When it comes time to apply for a mortgage, keep in mind that your lender may have restrictions. Only your lender can tell you what restrictions they place on RSUs and it’s best to determine what those are before you are knee-deep and under contract on a property. As always, make sure the rest of your finances are in order and be sure to demonstrate that you have adequate regular income to pay the mortgage. Seek the guidance of an experienced tax or financial advisor like MYRA Wealth in planning for and managing your wealth.