This subject will require a detailed response to give you a clear picture of all the ins and outs of restricted stock unit (RSU) use on a loan application, but the short answer is, yes! Under certain circumstances, you can absolutely use RSU’s as qualifying income on your loan application.
I can hear you asking, well… what are the “certain circumstances…”
First of all, you must be applying for a loan that specifically allows it. The programs we have that allow Restricted Stock Units and Stock Options are called “Select” and “Choice.” The names, and specifics will vary from lender to lender, but here are some guidelines that your RSU’s must meet regardless of what lender you are working with.
• They may only be used as qualifying income if the income has been consistently received for two (2) years, and is identified on your pay stubs, W-2s, and tax returns as income
• The vesting schedule must show that the income will continue for a minimum of three (3) more years at a similar level to the prior two (2) years shown on your pay stubs, W-2s, and tax returns
• A two (2) year average of prior income received from RSU’s or stock options should be used to calculate the income
• The continuance should be based on the vesting schedule by using a stock price that is based on the 52 week low for the most recent twelve (12) months with reporting at the time of closing
• The income used for qualifying must be supported by future vesting based on the same stock price that was used for qualifying and for the vesting schedule
• A Vesting Schedule is Required
• Vested restricted stock units and stock options cannot be used for reserves if they are being used for qualifying income
Real Talk Please!
It may be a little difficult to wrap your head around what all this means if you do not have a profession in some sort of finance, so let’s start with some definitions to make it a bit more digestible. I am sure there will be more than one reader who is not totally sure what some of these things actually are, so here we go…
Restricted Stock Units give your employer a way to grant you equity in the company that you work for. They are like normal stocks in that you own shares of the company, but they are restricted because you cannot use them in any way (no transferring, selling, gifting, etc.) until you have met the parameters set forth by your employer. There are several restrictions that your employer may have in place (performance goals, length of employment, etc.) but the most common restriction is a vesting schedule which usually encompasses the specific restrictions listed above.
Vesting Schedule is a timeframe that you wait to accrue full ownership of your RSU’s. It is during this timeframe that your shares will “vest.”
In the beginning of employment, your employer will assign you a specific amount of Restricted Stock Units, and notify you as to whether you are on a graded vesting schedule or a cliff vesting schedule.
Graded Vesting Schedules are constructed to allow a certain number of your total units to vest each year. Here is an example; you are granted 4,000 shares on May 1, 2017 with a four year vesting period, and 25% vesting each year.
Cliff Vesting Schedule is when you receive 100% of your restricted stock units all at once after you have either; been with your company for a specific amount of time, met a performance goal, reached a specific rank within your company, or whatever specific stipulation your company has set for you. The timeframe, and circumstances that allow your stocks to vest are often the same types of things in both graded and cliff vesting schedules.
Taxes and Restricted Stock Units
Upon vesting, RSU’s are considered income, and will be taxed as such. Your taxable income is the market value of the shares at vesting. In the example of a graded vesting schedule above, you would be taxed on the dollar amount of $20,000 in year one, $25,000 in year two, etc. The vesting of these restricted stock units will appear on your pay check, W-2’s, and tax returns.
In contrast to the scenario above, if you are on a cliff vesting schedule you will receive all your shares at ones and will be taxed on that one lump sum. The vesting will appear as income on one paycheck, and one W-2.
Your company might give you a couple options on how to pay taxes at vesting, but they also may require that you use a streamlined method. The most common way to handle taxes is to give a portion of your newly vested stock back to the company. This holds shares to cover the taxes under a net-settlement process, and company cash is used for the payroll tax deposit.
It is important to note that when you sell your shares down the road, you will also pay capital gains tax. This tax is based on any increase in value of the stock from what they were worth at the time they were given to you. If your stocks were worth $25 per unit or share at vesting, and a year later you sell 1,000 shares at $30 per unit, then you will pay capital gains tax on the $30,000 increase.
RSU’s For Qualifying Income
Now that the basics of RSU’s are fresh in your mind, we can revisit the guidelines listed above, and hopefully make a little more sense of them. If you plan to use Restricted Stock Units to qualify for a home loan, then here is what your RSU situation must look like in order to meet the parameters for use as qualifying income on a mortgage application.
• You must be on a graded vesting schedule of five or more years. If your vesting schedule is only five years, your RSU’s will only qualify as income after year two
• You must be at least two years into your vesting schedule
• Your pay stubs, W-2’s, and tax returns must show that you have received two years of restricted stock units
• You must provide a vesting schedule
• Your vesting schedule must show that you have a minimum of three more years left of your vesting schedule to receive RSU’s as income
Please remember that there are always extenuating circumstances, and this explanation of RSU’s is in no way exhaustive of all the parameters that may or may not be included in your companies and/or lenders policies. Here are a couple places to visit for more detailed information regarding the specifics of restricted stock units regarding vesting and taxes.
If you would like help with your specific situation in relation to the products we have available please contact us at any time.
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