RSU Income Guidelines for Mortgages

Restricted Stock Units (RSU) represent a significant portion of compensation for many tech professionals and executives, but using this equity income for mortgage approval requires understanding specific lender guidelines and documentation requirements. RSU compensation presents unique challenges due to vesting schedules, tax implications, and market volatility that traditional salary income doesn't face.

Understanding how lenders evaluate equity compensation helps borrowers leverage their total compensation package for real estate financing.

Understanding RSU Income Structure

Equity compensation differs fundamentally from traditional salary income, requiring specialized evaluation methods for loan approval purposes. Companies grant RSUs as future stock ownership rights that vest according to predetermined schedules, typically over 3-4 years with quarterly or annual vesting periods, but the actual income value fluctuates with stock price movements.

Financial institutions focus on the consistency and reliability of equity compensation rather than peak values, requiring borrowers to demonstrate sustainable compensation patterns over multiple vesting periods.

Lender Guidelines and Requirements

Most financial institutions require a minimum two-year history of vesting and sale to consider this income for home loan approval, though some portfolio lenders may accept shorter histories with strong compensating factors.

Primary approval criteria:

• Minimum 2-year vesting history
• Consistent employment with RSU-granting company
• Documentation of vesting schedules and future grants
• Tax returns showing equity income recognition
• Employer verification letters detailing compensation structure

Income calculation methods vary by institution, including averages of past 2 years of vested sales, most recent year if showing increasing trend, conservative projections based on current stock price, or percentage of future unvested RSUs (typically 25-50%).

Most institutions require borrowers to maintain employment with the granting company through loan closing to ensure continued vesting eligibility.

Documentation Requirements

Equity compensation verification requires comprehensive documentation that differs significantly from traditional salary verification, reflecting the complex nature of stock-based compensation packages.

Essential documentation includes:

• Federal tax returns (Form 1040) showing equity income
• Employer compensation statements
• Grant schedules for current and future awards
• Recent pay stubs indicating equity activity
• Employment verification letters mentioning stock compensation
• Brokerage statements showing sale transactions

Stock option vs. RSU distinction: Financial institutions treat RSUs differently from stock options since RSUs have inherent value upon vesting, while options require exercise decisions and may have no value if underwater.

Many institutions request detailed explanations of grant schedules, including acceleration clauses for events like company sales or employment termination.

Income Calculation Methods

Financial institutions employ various methodologies to calculate equity compensation for approval purposes, balancing income potential with the inherent volatility of stock-based compensation.

Historical Average Method

Most common approach: Calculate average annual equity income over the past 2-3 years of vesting history.

Example calculation:

• Year 1: $80,000 equity income
• Year 2: $120,000 equity income
• Year 3: $100,000 equity income
• Average annual income: $100,000

This method provides stability but may undervalue current compensation if stock prices have increased significantly.

Current Value Projection

Alternative approach: Project income based on current stock price and known grant schedules.

Some institutions apply discounts (typically 10-25%) to current projections to account for potential price volatility. This method works well for borrowers with substantial unvested grants but limited history.

Conservative Blended Approach

Risk-adjusted method: Combine historical averages with conservative future projections.

Many portfolio institutions use 50-75% of projected future equity income combined with full historical averages to balance opportunity with prudent risk management.

Timing Considerations

Equity compensation approval involves strategic timing decisions that can significantly impact loan capacity and approval likelihood.

Optimal timing strategies:

• Apply after strong vesting periods with favorable stock performance
• Consider recent sale transactions for cash flow demonstration
• Plan applications around tax implications of stock sales
• Coordinate with upcoming vesting events when beneficial

Timing challenges include stock price fluctuations affecting approval amounts, quarterly vesting creating income irregularity, tax withholding impacts on net proceeds, and company blackout periods preventing stock sales.

Special Considerations and Challenges

Equity compensation presents unique approval challenges that borrowers and financial institutions must address throughout the mortgage process.

Employment Continuity Requirements

Most institutions require continued employment with the granting company through loan closing and sometimes beyond initial loan periods.

Job changes can immediately disqualify equity income and may trigger loan reconsideration or denial if discovered before closing. Some institutions require employment verification updates close to closing dates.

Stock Price Volatility

Market fluctuations can dramatically impact approval between application and closing.

Significant price declines may require loan amount adjustments or additional income sources. Some institutions establish income floors to protect against moderate volatility.

Tax Implications

Vesting triggers immediate tax obligations regardless of sale decisions.

Borrowers must demonstrate ability to handle tax liabilities while maintaining mortgage payment capacity. Some institutions require evidence of tax planning strategies or sufficient liquid assets to cover obligations.

Strategic Applications

Equity compensation works best for loan approval when combined with thoughtful planning and realistic expectations about approval outcomes.

Borrower profiles that benefit most include technology professionals with 2+ years vesting history, executives with substantial stock compensation packages, employees at stable companies with appreciating stock values, and borrowers seeking jumbo loan amounts where equity income makes the difference. Stock-based compensation proves valuable for borrowers whose base salaries alone don't support desired loan amounts, particularly in high-cost markets where technology professionals commonly work.

Maximizing RSU Income Qualification

Strategic preparation can improve approval outcomes and loan capacity for equity-dependent borrowers. Document stock compensation patterns early, maintain detailed records of vesting and sales, and consider working with tax professionals to optimize timing decisions.

Technology professionals in Austin's growing tech sector benefit from LendFriend Mortgage's expertise in equity compensation approval, ensuring proper documentation, optimal timing strategies, and access to institutions who understand stock compensation complexities for competitive mortgage terms.