Does RSU Count as Income for a Mortgage?

Fundamentals of Restricted Stock Units as Income

Restricted Stock Units (RSUs) represent a form of equity compensation used by companies to attract and retain talent. Instead of receiving stock shares immediately, an employee is granted units that promise to deliver company stock, or its cash equivalent, at a future date. This promise is contingent upon meeting specific conditions, most commonly a vesting schedule, which can be time-based or performance-based. Time-based vesting involves a set period, such as a percentage of RSUs vesting annually over several years, while performance-based vesting requires the achievement of certain company or individual milestones.

RSUs are not considered taxable income at the time they are granted. Income recognition occurs when the RSUs vest, meaning the restrictions lapse and the employee gains ownership. At this point, the fair market value of the vested shares is treated as ordinary income. This income is subject to federal, state, and payroll taxes, similar to a regular salary.

Employers report the value of vested RSUs on an employee’s Form W-2, included in Box 1 (wages) and sometimes detailed in Box 14. Taxes are often withheld by the employer at vesting, often through a “sell-to-cover” method where a portion of shares is sold for tax obligations. Any gain or loss from selling shares after vesting is subject to capital gains tax, depending on the holding period.

Mortgage Lender Assessment of RSU Income

Mortgage lenders prioritize stable and predictable income when evaluating loan applications. While traditional salaries and hourly wages offer clear predictability, Restricted Stock Units (RSUs) introduce variability due to their dependence on vesting schedules and stock market performance. Lenders apply specific criteria to assess RSU income for mortgage qualification.

A primary factor lenders consider is the vesting history of the RSUs. They look for a consistent track record, often requiring at least two years of vested RSU income to consider it a recurring and reliable source. This history demonstrates RSUs are a recurring part of the applicant’s compensation. Lenders also seek assurance that RSU awards will continue for at least two to three years beyond the application date.

Lenders also evaluate the financial health and outlook of the company issuing the RSUs, as employer stability directly impacts the reliability of future RSU income. They may also consider the portion of the applicant’s total income derived from RSUs. Unvested RSUs generally do not count as current income for qualification, but vested RSUs converted to cash or held in a brokerage account can be considered. To account for fluctuating stock value, lenders commonly average RSU income over the past 24 months, or use a 52-week average stock price.

Required Documentation for RSU Income

When applying for a mortgage with RSU income, specific documentation is necessary to provide lenders a comprehensive view of this compensation. These documents verify the consistency and value of the RSU income stream.

W-2 Forms from the past two years are primary, reflecting RSU income reported as ordinary wages at vesting. Recent pay stubs show current compensation, including recent RSU distributions. Lenders require vesting statements or grant letters from the employer or brokerage to understand the structure and future predictability of RSU income. These documents detail original RSU grants, vesting schedules, and vested amounts.

If vested shares are held in a brokerage account, recent brokerage statements confirm ownership and any sales. Lenders may also request a Written Verification of Employment (VOE) from the employer. This verification confirms ongoing employment, the compensation package, and RSU schedule details, including continued awards. Providing clear, organized documentation helps lenders accurately assess RSU income for mortgage qualification.

Effectively Communicating RSU Income to Lenders

Applicants can improve their chances of leveraging RSU income for mortgage qualification by proactively communicating this compensation to lenders. Engaging with a mortgage loan officer early is advisable to understand their specific requirements and how they assess RSU income.

Preparing a clear summary of RSU history is beneficial. This summary should include grant dates, vesting dates, and the value of shares at each vesting event, potentially in a spreadsheet format. Explaining the company’s RSU program, its consistency, and how it forms a regular part of the compensation package can help lenders, especially if RSUs are a significant portion of income.

Maintaining consistent employment is important, as lenders prefer a stable employment history when evaluating equity compensation. Avoiding significant changes in compensation structure during the mortgage application period helps streamline the process. Presenting organized information and being prepared to answer detailed questions about the RSU program builds confidence with the lender, facilitating smoother approval.