Restricted stock units (RSUs) play a big role in compensation packages, especially for high-tech companies. For many, RSUs can make qualifying for a mortgage challenging. That’s all starting to change, and there are new guidelines that allow RSUs to be considered an eligible part of your income. To qualify for a mortgage using RSUs, make sure you’re working with a mortgage lender that understands compensation packages that include RSUs, and has experience underwriting mortgages using RSUs as part of your overall compensation.
Before deciding if you want to use your RSUs to help you qualify for a mortgage, it’s important to know what they are, how they work and how they’re taxed. RSUs are shares of the company that your employer grants to you. They’re restricted because you can’t sell them until they vest. Vesting usually happens after you’ve been at the company for a pre-determined time or have hit pre-determined performance goals. The shares either vest in stages (grading) or all at once (cliff). When your RSUs vest, they’re considered income and are taxed as such. Your taxable income is the market value of the shares at vesting. Once your shares vest, you can sell them. If you hold onto your shares for one year or more, any gain from the vesting date to the sale date will be taxed at long-term capital gains rates. However, if you sell them prior to holding them for one full year, the gain will be taxed as ordinary income.
Because RSUs are stock and the market can be volatile, it’s a good idea to have a healthy down payment ready (minimum of 5% and up to 20%) and an emergency fund with at least three to six months of living expenses before applying for a mortgage using your RSUs.
Typically, no more than 35% of your total qualifying income may be generated from RSUs. Your RSUs need to be shares in a publicly traded company.
Note: If there are concerns relating to the company’s financial situation and/or stock price performance, the lender could disallow the RSUs from being considered as part of one’s qualifying income. The underwriter will likely use 75% of the current share price (most recent closing share price) to validate future earnings based on the RSUs.
What will you need?
- RSUs must have been granted and vested (i.e. reported as income) for the prior two years with the current employer. You can find this information on your year-end pay stubs and W-2 forms.
- Vested RSUs and future vested options are sufficient to support the amount using to qualify for at least three more years. You may be able to download statements from your benefits website that reflect vested and unvested RSUs, along with the vesting schedule.
- Also supply the lender with a copy of your Restricted Stock Unit Award Agreement, which defines the terms and conditions of the award. You can also ask your HR department to help you with this as a verification of employment form (VOE), also required.
- In addition to vested RSUs, the continuance of RSU awards must be verified and must be of an amount consistent with the RSU qualifying income.
Please reach out to us if you need help connecting with a mortgage lender who has experience using RSUs to help you qualify for a mortgage as we work with many other professionals.
Written by: Hannah Ahmed, CFP®, CDFA®