Do RSUs Count as Income for a Mortgage?

Restricted Stock Units (RSUs) have become a common component of compensation packages, particularly in technology and other growth industries. These units represent a promise from an employer to grant shares of company stock to an employee once certain conditions, such as continued employment over a set period, are met. As individuals consider significant financial commitments like a mortgage, a frequent question arises: do these RSUs count as income for a loan application?

How Lenders View RSU Income

Mortgage lenders consider Restricted Stock Units as a potential source of income, but their assessment differs significantly from traditional salary or wage income. Generally, RSUs are only recognized as income after they have vested and been distributed to the employee. This means the value becomes tangible and taxable. Lenders typically require a demonstrated history of RSU income, often spanning at least one to two years, to establish its reliability and consistency.

The variable nature of RSUs, tied to the fluctuating market price of company stock, makes them less predictable than a fixed salary. For this reason, lenders often treat RSU income similarly to bonus or commission income. They seek to understand the regularity and predictability of these payments, focusing on the value realized by the applicant. This realized income, rather than the initial grant value, is what lenders consider when evaluating an applicant’s financial capacity.

Lenders also assess the stability of the company issuing the RSUs, particularly if it is publicly traded, as this can influence the perceived reliability of future RSU income. The goal is to ensure that the income stream is likely to continue for the foreseeable future, providing a stable basis for loan repayment. While RSUs can significantly augment an applicant’s total qualifying income, their unique structure necessitates a careful evaluation process.

Required Documentation for RSU Income

When applying for a mortgage and seeking to include RSU income, applicants must provide specific documentation to verify its history and consistency. A primary document is the W-2 form, which reports the fair market value of vested RSUs as ordinary income. Lenders review W-2s for at least the past two years to establish a pattern of RSU income.

Pay stubs are also important, as they can reflect RSU income as it vests and is processed through payroll. These documents help verify recent RSU distributions and demonstrate that the income is regularly received. Lenders often request pay stubs covering several months to confirm ongoing receipt.

Additionally, applicants will need to supply vesting statements or agreements from their employer or the brokerage firm managing the RSUs. These statements detail the RSU grant terms, vesting schedule, and history of vested and unvested shares. Some lenders may also request a written verification of employment directly from the employer, which confirms the applicant’s current employment status, compensation package, and RSU schedule, often projecting future vesting for a few years.

Underwriting Standards for RSU-Based Compensation

Mortgage underwriters evaluate RSU income to determine its eligibility and qualifying amount. A consistent history of RSU income is required, with most lenders looking for a minimum of two years of vested RSU income. This historical data helps underwriters confirm its reliability. In some cases, a history of RSU income from a previous employer can contribute to meeting this requirement if the applicant has been with their current employer for less than two years.

To account for the inherent volatility of stock prices, lenders often average RSU income over a specific period, commonly 24 months. For instance, if RSUs were distributed as shares, the total number of vested shares received over the past two years might be multiplied by a stock price average and then divided by 24 to derive a monthly income figure. If RSUs were distributed as cash equivalents, the total dollar amount received over the same period would be divided by 24. This averaging method aims to smooth out short-term fluctuations in stock value.

Underwriters also consider the future vesting schedule, requiring assurance that RSU income is likely to continue for at least three years beyond the mortgage application date. This projection helps confirm the long-term stability of the income stream. The financial health and public trading status of the issuing company are also important factors, as lenders prefer RSUs from established, publicly traded companies due to their transparency and liquidity. Some lenders may also impose limits, such as allowing RSU income to account for no more than 35% of an applicant’s total qualifying income.

Strategies for Mortgage Applicants with RSUs

Applicants with RSU income can proactively take steps to enhance their mortgage application. Initiating early communication with potential lenders is beneficial; this allows for a discussion about their specific RSU compensation structure and how it might be viewed. Understanding a lender’s approach to RSU income from the outset can help manage expectations and identify suitable mortgage products.

Organizing all required RSU-related documentation well in advance of the application is another helpful strategy. Having W-2s, pay stubs, and detailed vesting statements readily available can streamline the verification process for lenders. This preparedness demonstrates financial organization and transparency, which can be viewed positively by underwriters.

Applicants should also seek to understand how their chosen lender calculates RSU income, including the specific averaging periods or valuation methods used. Asking about these details can provide clarity on how much RSU income will contribute to their qualifying amount. If the calculated RSU income is lower than anticipated, considering a larger down payment can sometimes offset perceived income variability, making the application more appealing to lenders.

Working with a mortgage broker who has experience with RSU compensation can also be advantageous. Such brokers often have relationships with lenders who are more familiar with and accepting of non-traditional income sources. Applicants should also understand the tax implications of RSUs, as the fair market value at vesting is taxed as ordinary income, affecting net income available for mortgage payments and personal financial capacity.