Table of Contents
- What are Restricted Stock Units?
- Can RSUs be used as income for a home loan?
- How can you use vested income to qualify for a mortgage?
If you work in tech or finance, especially in California, you may receive Restricted Stock Units (RSUs) as a part of your compensation package. Companies like Google, Apple, Facebook, and Salesforce often offer RSUs, as do many thriving startups. If RSUs are part of your income, you might be wondering if they can help you qualify for a mortgage. This guide explains what RSUs are, how they impact your income, and how you can potentially use them to secure a home loan.
What are Restricted Stock Units?
Restricted Stock Units, or RSUs, are company shares granted to employees as a part of their overall compensation. However, they come with certain "restrictions." You can't immediately sell or access them until they "vest" or become yours over a set period. Vesting typically happens in increments, meaning a portion of the RSUs is available each year as long as you stay with the company or meet specific performance goals. For example, if you’re awarded 1,000 RSUs, you might see 250 of them vest each year over four years.
RSUs are often part of compensation in industries like technology, biotech, and finance, where companies use them as an incentive to attract and retain talented employees. These units align your interests with the company’s success: as the company’s stock value rises, so does the value of your RSUs. But RSUs differ from typical income sources in a crucial way—they’re only taxable once they vest.
How RSUs are Taxed
When RSUs vest, they become part of your taxable income, and the IRS taxes them like ordinary income. The amount of tax you owe depends on the market value of the stock on the day it vests, so if the stock price is high on that day, your taxable income increases. This variability is important because it can impact the income that lenders consider when assessing your mortgage application. Additionally, if the stock’s value changes in the future, it could affect your financial situation, making it crucial to plan carefully when relying on RSUs as part of your mortgage qualification process.
Can RSUs be used as income for a home loan?
Using RSUs as qualifying income for a home loan is possible but can be tricky, as not all lenders accept them. Lenders generally prefer straightforward income types like salary or hourly wages that are predictable over time. RSUs, however, depend on stock market performance, making them more variable. Yet with the right mortgage partner, RSUs can count toward your qualifying income.
Why Some Lenders Don't Count RSUs
Traditional lenders often don’t count RSUs toward income because they may not be familiar with the compensation practices in certain industries, such as technology or finance. The value of RSUs can fluctuate, and lenders must assess a borrower’s ability to repay the loan reliably. This variability might seem risky to some lenders, especially if they are unfamiliar with handling non-traditional income sources.
Working with Lenders Who Understand RSUs
At Carlyle Financial, we work with lenders who understand the nuances of RSUs and can integrate them into your overall financial profile for a mortgage application. Our partners are well-versed in evaluating RSUs for borrowers, particularly those in fields where stock-based compensation is common. This means Carlyle Financial can guide you through documenting and using your RSUs effectively, helping you access more options and potentially increase your approved loan amount.
By presenting a thorough record of your RSUs—like a vesting schedule and documented value history—you can demonstrate stability in this income source, which can be advantageous when applying for a loan. A seasoned mortgage advisor will take all these details into account, allowing for a comprehensive evaluation of your financial strength.
How can you use vested income to qualify for a mortgage?
To use RSU income for mortgage qualification, lenders generally require detailed documentation to understand the consistency and value of this income source. Here are some documents typically requested when applying for a loan using RSUs:
- RSU Vesting Schedule: This document outlines when your RSUs vest and when you’ll be able to access the stock. It provides a timeline of your stock-based income, which helps lenders see a pattern and forecast the stability of this income.
- Current RSU Balance: This shows the total value of your RSUs, both vested and unvested. For mortgage purposes, only the vested RSUs can be considered, but showing the full balance demonstrates your long-term earning potential.
- History of RSU Income: Lenders typically want at least two years of vested RSU income to ensure consistency. You may need to provide statements from the financial institution that holds your stock or company records that show your history of receiving RSUs.
- Written Verification of Employment: This comes directly from your employer and confirms your status, compensation package, and RSU schedule. It can serve as a reliable source for lenders to confirm your ongoing access to RSUs.
The Importance of a Two-Year History
Most lenders require at least a two-year history of vested RSU income to consider it stable enough for mortgage qualification. This two-year minimum demonstrates that your RSUs are a recurring income source and not a one-time event. Additionally, lenders may want assurance that you’ll continue to receive RSUs for at least two years beyond the mortgage application date. This means that if you’ve been with your current employer for less than two years, having a record of RSUs from a previous employer can sometimes help meet this requirement.
Other Financial Considerations
In addition to RSU documentation, standard lending criteria like your credit score, debt-to-income (DTI) ratio, and cash reserves are part of the mortgage application. Since RSUs are variable, a strong financial profile with a solid credit score and a manageable DTI ratio will support your case. Cash reserves are also beneficial as they demonstrate additional financial security.
Calculating RSUs into Debt-to-Income Ratio
Lenders calculate your debt-to-income (DTI) ratio by dividing your monthly debts by your gross monthly income. Because RSUs can add to your income, they can help lower your DTI ratio, making you more likely to qualify for a mortgage. However, the fluctuating value of RSUs can complicate this calculation. To account for variability, lenders may only consider a percentage of your RSU income based on the stock’s historical value. By providing evidence of the stability of your RSU income, you can help ensure that it’s appropriately reflected in your application.
Is Using RSUs for a Mortgage Right for You?
While RSUs are a fantastic form of compensation, they do require careful planning when being used for a mortgage. Their reliance on stock price fluctuations can impact your financial picture, so be sure to work with a mortgage expert who understands RSUs. At Carlyle Financial, we specialize in working with clients who have non-traditional income, providing tailored advice to help you achieve your homeownership goals.
By leveraging the right mortgage advisor, RSUs don’t have to restrict your dream of owning a home. With our help, you can maximize your income sources and find a mortgage product that fits your unique financial landscape. If you’re ready to explore your options or have questions about how RSUs could influence your mortgage approval, reach out to a Carlyle Financial mortgage banker today.