On applying for a mortgage, you will be screened on various sources of income to establish whether you can service the loan. One such form of remuneration that has become increasingly popular of late, particularly in tech-intensive regions like San Francisco, is RSUs, or Restricted Stock Units. RSUs make working for their company an alternative source of income for employees. They are a lifeblood to the mortgage approval process for people who include them in their income.
What are RSUs? How Do They Work and Affect Mortgage Qualification?
RSU stands for Restricted Stock Unit. It is a form of equity compensation, where an employer grants an employee company stock, but unlike standard stock grants, in this case, there are some restrictions. The main difference here is that when the stock is granted to employees, they don't obtain ownership of it immediately. Instead, they have to wait until the end of the vesting period and only then can they exercise the stock and, subsequently, turn it into real shares or cash.
They take place in companies such as tech and finance, which will utilize them to bring in and retain their best employees. They do give people the potential to share in the growth of their company, but since it is not available immediately as liquid assets, it is different from a standpoint regarding a mortgage application.
How RSUs Impact Mortgage Qualification
While RSUs may be a valuable part of an employee's compensation, it makes what would otherwise be a relatively simple determination as to whether they should be included as income much more complex in the eyes of the mortgage lender.
Lenders are wary of RSUs since they are not guaranteed cash inflow during the time of loan approval. It carries a vesting schedule meaning that the employee cannot treat or sell the stocks for cash right away until it matures. This is a risk for the lender. Hence they have to analyze the track record and stability of the income attached to the RSUs before considering it in the calculations of mortgage calculations.
RSU Income and Lender Requirements
One of the most important things for a borrower to consider if they are using RSUs as qualification will be that lenders are going to look at two significant areas:
History of Receiving RSUs
A lender looks to ensure that an applicant has had a consistent history of receiving RSU compensation. If a borrower has recently started receiving RSUs and is looking to use that as income for mortgage qualification, the lender may not use that compensation. For lack of proven past history receiving RSUs, this income may never be received in the future, and the lender has to rely on the borrower's persistence in passing consistent mortgage payments.
For instance, an employee who only just started receiving RSUs in the last 30 days does not have enough depth to their compensation history. Instead, if you have been getting RSUs for more than one year, then it is easier for a lender to see the consistency of that income.
Vesting Schedule
A vesting schedule outlines when the RSUs actually convert into stock or cash. The lender will want to see that this vesting schedule is long term and extends out several years in the future. The standard vesting schedule often spans three years, meaning the employee can't cash out all of his or her RSUs at once.
A vesting schedule spreading the maturity of the RSUs longer periods leads to assurance by the lender of income source stability after the mortgage is granted because RSU compensation may stop or drastically drop shortly after the closing loan, and the borrower may fail in making his mortgage payments.
Why Consistency and Longevity Matter
A lender is interested in having surety that any income applied for the purpose of qualification will be stable and sustainable. A good lender does not like to take chances wherein an applicant chiefly depends on RSU income which may promptly disappear.
If the RSU vesting schedule is too short, or if there isn't enough of a history of receiving RSUs, then the lender may not count this income to qualify the borrower. Because both how long you have received your RSUs and how long you will continue to receive them are relevant to lenders,
Other Factors Lenders Consider
While RSUs can absolutely be added to an income profile for mortgage purposes, they cannot be taken in a vacuum. Lenders will look at the overall financial picture, including salary, bonuses, and other forms of compensation. They will also check your DTI to ensure you can easily afford the mortgage.
But if you are using RSUs to qualify, then you need to provide more detailed information. This also includes statements from your employer detailing your award history in RSUs and the vesting schedule in order to give lenders a better chance to look at your future income flow.
Conclusion
RSUs can be an important part of your compensation if you work in sectors where stock-based pay is prevalent. So, just in case you need to qualify for a mortgage sometime soon, you should be aware of how they perceive this kind of income.
The more time you have on the books receiving RSUs and vesting into the future, the easier it becomes to make an argument that the income stream resulting from that income is long term and predictable.
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