How Restricted Stocks Can Improve Your Mortgage Potential
There are many assets that you can use on your loan application, including restricted stock units. If you receive this compensation from an employer, it may be a good idea to apply these funds to your loan.
Using Restricted Stock Units on Your Loan?
What are Restricted Stock Units?
There are many ways that an employer rewards an employee for their work. The most basic, of course, is salary, wages, and bonuses. But there are other forms, including benefits like health insurance, life insurance, wellness incentives, and discounts. There is also retirement matching, among and other retirement-focused benefits.
A restricted stock unit is simply another form of compensation or employment benefit. These are simply units of company stock that the employee cannot sell for a given period. They are issued to an employee through a “vested” plan and distributed after the employee reaches a certain milestone, which is usually working for the company for a certain timeframe.
They give the employee an interest in the company but no real value until the vesting schedule is complete.
Graded vs Cliff Vesting Schedule
To understand RSUs, it helps to know the two types of schedules used for vesting. (This will also come up when using RSUs on your loan application.)
With graded vesting, employees earn a certain percentage (or a “grade”) of their RSU benefits following an initial period. The percentage that the employee owns increases each year until they own 100% of their stock units. Suppose someone is on a five-year schedule. In this case, they would have access to 20% one year, 40% the next, 60% the next, and so on until they own 100% by the fifth year.
With a cliff vesting schedule, the employee owns 0% until they complete the five-year. At that point, they go from 0% to 100% vesting of the stock units.
While the ownership and liquidity status of this compensation is different, they can be used on your application. However, you likely won’t be able to use 100% of the stock’s value, and you will have to provide a variety of information to finalize the loan.
Why Use Restricted Stock Units on a Loan Application?
Before we go into the details of using RSUs on your loan, you need to understand why.
One of the main benefits for using RSUs is that is could help you get approved for a larger loan, which could mean a larger property, a house in a high-demand neighborhood, or a home with more luxury and convenience features. Generally speaking, the bigger your income, the more loan you will be able to secure.
Lower Interest Rate
Increasing your income creates a reduced risk to lenders. They can reward this reduction in risk by offering lower interest rates. If you apply restricted stock units to your loan application, it could mean a more affordable loan in the long run.
An Improved DTI Could be the Difference in Approval
One of the top factors that a lender will consider is the debt-to-income ratio, which is simply the ratio between your monthly income and your monthly debt load. So if you earn $10,000 a month, and you have monthly debt payments of $2,500, you have a DTI of 25%. But if you had an average monthly income of, say $12,500, your DTI would be 20%.
To put it simply, if you have a high income, your DTI will be lower. Therefore, if you can apply your restricted stock units to the loan application, the listed DTI could be better, resulting in a higher change of approval.
Why go to the trouble? Because it can not only result in a better loan, it could be the difference between loan rejection and loan approval!
Requirements for Using RSUs on Your Loan
To use restricted stock units on your loan application, you’ll need to meet a variety of requirements.
First of all, restricted stock units can only be used as qualifying income if it has been received for two years and has been identified on your pay stubs and W2 information, as well as your tax returns.
You’ll also need to show the vesting schedule for the RSUs. This schedule must show that the income will continue for a given period, and that it will maintain the same level for at least two years.
Some lenders simply don’t use RSUs on the application, so if you come across this issue, you should check with other lending offices to see if it is an option. There is likely a lender that accepts RSUs in your area, so shop around and you should be able to apply this income to your loan.
To use RSUs, you will likely be able to apply a percentage of the value to your loan application, usually this is around 70% to 80%. Suppose you receive restricted stock units valued at $10,000 every year. If the lender uses 75%, for example, they would apply $7,500 to your annual income, which would mean an additional $625 could be applied to your monthly income.
The use of RSUs may also depend on the performance of the company. If the company is currently struggling, the lender may not use the stock units, as they could be diminished in value, or even worthless, in the coming years. The lender, depending on their process, may prefer to leave stock units off the application if the company is struggling.
The lender could also require that you sell the units in order to apply them to the application. This is not always the case, but they may prefer that the stock units be converted into cash instead of remaining as potentially risky stock. This could be impacted by the state of the company.
Use Restricted Stock Units to Improve Your Mortgage Loan
If you are interested in using restricted stock units for your next application, contact our team today. We’ll help you get the right loan for your specific needs, and make sure all your resources are utilized to ensure the strongest loan possible!