Does your employer offer restricted stock units as part of your compensation package? Recently, a client asked if they could use restricted stock units as qualifying income to apply for a home loan. It’s becoming more common for big tech companies like Amazon and Google and large corporations to offer company stock to their employees. Many times this stock is offered in the form of restricted stock units (RSUs). Can RSU income help you get a better mortgage?
If you’ve been awarded RSUs as part of your employment offer or compensation package, you could qualify for a better home loan. You might be able to afford a higher-priced home, increase your buying power, or even get a lower mortgage rate.
There are restrictions in place and criteria that borrowers must meet before a lender counts RSU income as qualifying income for a mortgage. So if you’d like to use your RSU income as qualifying income to apply for a mortgage, this article can help.
Benefits of Using Restricted Stock Units When You Apply for a Mortgage
RSU income and bonus income can help you qualify for a better mortgage and often increase your buying power. By using RSU income as qualifying income toward your mortgage, you’ll be able to buy more house than you thought.
You can also lower your debt-to-income ratio by counting your RSU income. Reducing your overall debt-to-income ratio can lower your mortgage rate and even get you better terms on your home loan.
If RSU income is a substantial part of your employment compensation, talk to your mortgage advisor about documentation that might be needed so you can be ready when you apply for a mortgage.
The Basics: What Counts as Qualifying Income for a Mortgage
When you apply for a mortgage, lenders look at two big factors to determine your ability to repay your home loan: your credit score and your debt-to-income ratio. From a lender’s point of view, these two factors indicate whether or not you’ll be able to pay your mortgage and fulfill the terms of your home loan.
So then, what exactly is qualifying income? Qualifying income is the income that a lender counts toward your mortgage application when you’re ready to apply for a home loan.
Several types of income will count toward your home loan application, but not every lender will accept every kind of income.
Common Examples of Income:
- Salary / W-2 Income
- Investment Income
- Self-Employment Income / Business Income
- Commissions and Bonuses
- Spousal Support / Alimony
- Rental Income
Restricted stock units can be considered qualifying income if you meet specific criteria, but not every lender will accept RSU income toward your home loan application. For this reason, it’s wise to work with a mortgage advisor that understands RSUs so you can qualify for the best home loan possible.
Most Lenders Have Specific Criteria to Count RSU Income
Lenders typically require the following criteria to count your RSU income as qualifying income toward your mortgage. Since lender requirements vary, it can help to talk with a qualified mortgage broker first.
- RSU income must be issued from a publicly-traded company.
- Restricted Stock Units must be both granted and vested for at least 2 years.
- RSU income typically won’t count for more than 35% of your qualifying income.
- You’ll be required to show proof of your RSU award and a vesting schedule for the next 3 years.
Documentation for Using Restricted Stock Units as Qualifying Income
Mortgage lenders have specific guidelines for borrowers who want to use restricted stock units as qualifying income. Depending on the lender, the following documentation might be needed:
- W-2 and tax returns for the past two years
- Recent paystub that shows RSU income distribution for the current year
- Formal RSU award agreement which outlines the vesting schedule along with terms and conditions
- Documentation for the past two years that shows your RSU income, current balance, vested shares, and unvested shares
We can walk you through the process and make sure you have all your documentation in place when you’re ready to apply for a mortgage and get started.
How to Calculate RSU Income when Applying for a Mortgage
In general, most lenders will look at the 52-week average value of your company’s stock to determine its current value. Why? The value of a company’s stock is based on its sales price. Due to stock market volatility, your company’s stock may change several times a day and fluctuate considerably throughout the year.
To calculate your RSU income, take your total number of vested shares (during the past two years) and multiply it by the annual average of your company’s stock price. Some lenders will count the full annual value based on this equation. Other lenders may only recognize up to 70% as a conservative estimate.
If you receive company stock as part of your compensation, make sure to talk to a mortgage advisor about your options. Some lenders will consider employer compensation such as restricted stock units as qualifying income when applying for a mortgage. Borrowers will need to meet specific criteria and provide required documentation.
The good news is that you might be able to increase your buying power and qualify for a better mortgage.
As a licensed mortgage broker in California, Oregon, Washington, and Colorado, we partner with several approved mortgage lenders who count restricted stock units (RSUs) as qualifying income. If you want to use RSU income to apply for your next mortgage, give us a call. We can help.