Do Bonuses and RSU Income Count in Qualifying Mortgages?
Mortgage lenders make it easier for some borrowers who work for large companies to qualify for a home loan.
Tech companies like Google and Amazon, as well as other big companies like Wells Fargo, offer their employees additional compensation in the form of company shares.
Some lenders, known as Restricted Stock Units (RSUs), consider this type of compensation, along with bonuses, to be qualifying income. Some won't.
When it comes to counting RSU and bonus earnings, lenders have specific guidelines. Here's what you need to know:
Check your mortgage eligibility with RSU and / or bonus earnings (December 23, 2020).
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RSU and Bonus Income for Mortgages
In some cases, RSU and bonus earnings are counted towards a mortgage loan that helps you buy or refinance high-priced real estate.
However, it can be difficult to find lenders to accept these payments as part of your income. And even if you do, there are several different ways it can be counted.
It is important to shop around and compare options when qualifying with RSU and Bonus Income, as the mortgage lender you choose to work with can have a huge impact on your home buying budget.
Using bonus earnings when applying for a home loan
If your compensation plan includes bonuses, you may be able to use them as an additional source of income if you qualify for a home loan.
Similar to overtime earnings, in order to be considered for qualification, lenders want to see a regular history of bonuses received over a period of two years or more.
Lenders require documentation to prove your bonus earnings on paystubs, W2s, and tax returns.
You also want to know if your bonuses are likely to continue to exist. The likelihood is usually defined based on a written review of employment in your company.
If you haven't received bonus income for at least a year, it likely can't get the full value for your loan approval.
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How to use constrained stock income on a mortgage
Mortgage lenders have specific guidelines for potential homeowners looking to use restricted stock income for their mortgages.
The lender must provide a vesting schedule and documentation detailing the terms of the restricted share agreement.
Similar to Bonus Income, you must have restricted shares available to your current employer for at least two consecutive years. This should be documented through pay slips, W2s, and tax returns.
In addition, the vesting schedule must indicate that RSU earnings will remain at a similar level to the previous two years for at least three years.
Some additional requirements for restricted stock income include:
The company that grants restricted stocks must be publicly traded. No more than 35% of the income can consist of restricted stocks. Permissive restricted stock units and stock options cannot normally be used for reserves if used for qualified income
When you factor in future restricted stock returns, your lender can use the previous year's average stock price rather than based it on projected earnings.
Some lenders may choose to average the constrained stock earnings over the past two years and base future earnings on that number.
Calculation of RSU and bonus income
RSU and bonus earnings can help you qualify for more homes than you could otherwise possibly buy.
Calculating bonus earnings is pretty straightforward. Lenders typically take the amount of bonus earnings received over the past two years and divide it by 24 months to generate a monthly "income".
However, income from RSUs can be more complicated because the actual value of your stock units will depend on your company's stock prices.
The share price of a share can change several times a day. Due to the volatility of stock prices, lenders typically use an average stock price of 52 weeks to calculate your income from the RSU.
Here is an example of how RSU income can be calculated for a home purchase:
Five years ago, Lucas was hired with a compensation package of $ 90,000 and a grant of 3,000 RSU that was supposed to vest after four years.
When applying for a home loan, the average stock price for 52 weeks is $ 15.
For qualifying purposes, this means Lucas's monthly income from the RSUs is $ 1,875 (3000 shares multiplied by $ 15 and divided by 24 months).
This brings his total qualifying income to $ 112,500. ($ 90,000 salary + $ 22,500 RSU income = $ 112,500).
With an additional $ 22,500 used for qualification, Lucas' purchasing power is a whopping 25% higher than if he had qualified based on salary alone.
Note: Some lenders may only use 75% of the current stock price as a conservative estimate of value.
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Other factors that will affect your mortgage application
Remember, income isn't the only thing that matters when you apply for a loan. Lenders will also look carefully:
recognition – While some lenders still drop to 580, most lenders want a credit score of at least 620. The higher your credit score, the lower your mortgage rate – and the more home you can affordDebt-Income Ratio – The Debt-Income Ratio (DTI) compares your monthly income to your monthly debt obligations (car loan, credit cards, student loans, etc.). The more debt you already have, the less willing a mortgage lender is to lend yousavings or "reserves" – Lenders want to see cash reserves when buying a home. This is the money left in the bank after your down payment and closing costs are paidMortgage Interest – The interest rate you qualify for will determine your mortgage payment and your home purchase budget. Shop and compare prices to make sure you are getting a competitive rate
These are just a few of the factors that most mortgage lenders consider.
Different lenders have different rules about what exactly can be used to qualify for funding.
The final result
Bonuses and RSU earnings can give your home buying budget a huge boost.
This is especially helpful for home buyers looking to buy high-priced real estate in areas like San Francisco, New York, and Seattle.
However, it can be difficult to find lenders who count RSUs and bonuses as a source of income. It's even more difficult to find a lender that will maximize the amount that you can qualify with.
Hence, you should explore all of your options. When comparing interest rates, also check the lenders by asking how they calculate different types of income.
It can be helpful to ask people in a situation similar to yours which lenders they have worked with successfully.
Good luck and have fun looking for an apartment!
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