When it comes to qualifying for a mortgage, many homeowners are surprised by the complexities of using their Restricted Stock Unit (RSU) income. While RSUs can be a valuable component of a compensation package, especially in tech or public companies, their use in qualifying for a home loan can present some unique challenges. In this post, I’ll break down the essentials of how RSU income factors into mortgage qualification under Fannie Mae (FNMA) and Freddie Mac (FHLMC) guidelines.
What Are Restricted Stock Units (RSUs)?
RSUs are a form of compensation offered by an employer in which an employee receives shares of company stock after meeting specific conditions, such as staying with the company for a set period or achieving performance goals. While RSUs are a fantastic long-term financial benefit, the way they are used to qualify for home loans varies depending on whether you’re dealing with Fannie Mae or Freddie Mac loan products.
9 Key Guidelines for Using RSU Income in Mortgage Qualification
- Documentation Requirements
- Fannie Mae: A vesting schedule showing past and future vesting, along with a statement from your brokerage account, is needed. A 200-day moving average of your company’s stock price is also required.
- Freddie Mac: Similar to Fannie Mae, but a 52-week average of the stock price is used.
- Income Documentation
- Fannie Mae: You’ll need your most recent paystub showing year-to-date (YTD) RSU income, as well as W-2s for the past two years.
- Freddie Mac: The requirement is the same for time-based vesting, but for performance-based vesting, you’ll need W-2s from the past two years.
- Vesting Periods
- RSUs can vest based on time (after a certain period) or performance (after specific goals are met). These distinctions matter when determining eligibility for mortgage qualification.
- History Requirements
- Both Fannie Mae and Freddie Mac require at least 12 months of RSU history for time-based vesting and recommend 24 months for performance-based vesting. Shorter histories may be acceptable with positive offsetting factors.
- Continuance Requirements
- Fannie Mae: Continuance of income is generally not required unless there are gaps in RSU awards. In that case, the vesting schedule must show at least three years of future distributions.
- Freddie Mac: A three-year continuance is required for time-based vesting, though performance-based income does not need proof of continuance.
- Income Calculation
- For Fannie Mae, the 200-day moving average stock price is used to calculate income, while Freddie Mac uses the 52-week average. Both programs divide vested shares over 12 to 24 months depending on the vesting type.
- Trend and Frequency of Payout
- The frequency of RSU payouts and whether the trend is positive or stable can influence how the income is treated in the qualification process.
- Positive Factors for Performance-Based Vesting
- Positive indicators, such as future RSU vesting schedules showing equal or greater awards than previous years, can help strengthen your mortgage application.
- Confirming the Stock is Publicly Traded
- To use RSU income, the borrower’s employer must be a publicly traded company on indexes like the Dow Jones, NASDAQ, NYSE, or an equivalent foreign exchange.
Understanding the nuances of RSU income when qualifying for a mortgage can be tricky. The key is providing the right documentation and knowing which guidelines apply to your situation.
If this all seems overwhelming, don’t worry—I’m here to help! Whether you’re a first-time buyer or looking to upgrade, navigating the use of RSUs in the mortgage process doesn’t have to be complicated. Feel free to reach out, and let’s discuss your specific situation.
Ready to make your dream home a reality? Book an appointment today, and let’s get started on your mortgage journey!