RSU Income & Mortgage Qualification

Working for a tech company—like Amazon—that uses Restricted Stock Units (RSUs) as compensation, can limit your ability to qualify for the home mortgage you might desire. Luckily, more mortgage providers now accept income from RSUs in their qualification calculations, but it may take some advanced planning on your part.

This change is likely based on demand from borrowers—as more companies offer RSUs—and potentially on a change to Freddie Mac standards back in 2017. The Federal Home Loan Mortgage Corporation (known as Freddie Mac) is one of the government-sponsored entities that purchases and securitizes mortgage loans in the United States.

So can I use RSU income to help qualify for a mortgage? The short answer is yes, with significant restrictions, and the lender probably won’t include as much RSU income as you would like.

RSU Income

The income received from RSUs when they vest. The value of an RSU becomes taxable income at vesting, regardless of whether or not you cash them out. But mortgage providers may require shares to be converted to cash (sold) to be considered RSU income for mortgage qualification purposes.

The basics for getting a mortgage using RSU income (based on our research and experience):

  • Must have documented RSU income during the past two years on your tax return (e.g., during 2016 and 2017 if applying for a mortgage in 2018)
  • Underwriter will want to see your RSU vesting schedule for the next two to three years
  • In valuing future RSU income, the mortgage provider will likely discount the current stock price or use a historical average (e.g., average stock price over prior 12 months)—which, for those at Amazon, is obviously different than the 15% annual growth they assume
  • Alternatively, lenders may calculate qualifying income from your average RSU income over the prior two years (i.e., divide total RSU income from prior two years by 24 to get monthly qualified income from future RSUs)
  • Typically, only 35% of your qualifying income can be from RSUs

Mortgage Qualifying Income

The income sources that a mortgage lender considers when calculating the loan size you qualify for. Salary is often the largest income source, but lenders can also include RSU income, investment income, self-employment/business income, bonuses, and other sources when adding up your total qualifying income.

Implications:

  • You need to have been employed at the firm for more than two years and may need to have been converting vested RSUs to cash
  • Given recent stock market performance, the historical average price used to calculate future RSU income may be significantly below the current value
  • If you have a back-weighted RSU vesting schedule—like Amazon uses for new hires—after two years of employment your historical income from RSUs may be below your expected future RSU income
  • Depending on your future vesting schedule, you may not have RSUs vesting out three years in the future—potentially resulting in the underwriter not allowing the full value of RSU income since your “verifiable” future income won’t have RSU income in every calendar year

Hence, the amount of qualifying income accepted from RSUs will likely be well below what you expect to earn from vesting RSUs in future years.

What to do:

  • Plan ahead—especially if you have recently started at your employer—to build and implement a financial plan that best positions you to achieve your home buying goals
  • Gain a clear understanding of your compensation plan, employer’s compensation practices, and what your income is likely to be over the next three years
  • Gather the necessary documentation
    • W-2, bank statements, etc. (required for all mortgage applications)
    • Tax returns for prior two years
    • RSU award agreement(s)
    • Current balance of vested and unvested RSUs
  • Find a mortgage lender who is willing to consider RSU income for mortgage qualification (see below for a starter list)
  • Get a pre-qualification letter from your lender
  • Find your dream home and submit an offer…best of luck!

Mortgage lenders you may want to research (who indicate that they will accept RSU income)

If we can be of any assistance as you navigate the home buying process, please contact us to schedule a complimentary, initial consultation.


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