Buying a Home with Restricted Stock Units

Get this: over 40% of Fortune 100 companies have been using restricted stock units (RSU) since 2005. What does this mean?

If you're working at a technology company in Seattle, chances are that you have some RSU income to burn as well. 

Are you in the market for a new house? Luckily for you, your RSU can actually help you qualify for a loan.

Read on to find out about using restricted stock units to help you buy a home!

What is a Restricted Stock Unit?

What is a restricted stock unit? We're glad that you asked. In a nutshell, restricted stock is a special type of stock with unique restrictions on how it's received and distributed. 

For those that are scratching their heads, it's not really as confusing as it seems. Let us explain: just like a regular stock plan, you can get your hands on restricted stock when it's given to you by your employer. When it comes to traditional stock options versus RSU, restricted stock options do not have a standard exercise feature.

Why is this so important? That's because restricted stock units are kept by your company until they have finished their vesting schedule. At that point, your restricted stock units will gain “full-value grant" status - meaning that your shares will contain the full amount of company stock you were given at the time it was granted to you. 

If you've ever had a traditional non-qualified plan with your employer before, then you probably already know that restricted stock units are pretty much the same thing. Pro tip: you should know that there is a potential risk of losing your stocks too. 

But don't worry, that'll only happen if your stocks aren't able to meet the needs of the vesting schedule. Expect to give your money back to your employer if that's the case. 

What exactly is a vesting schedule? Essentially, it's a list of requirements that you have to meet to receive your share of RSU stocks. Typically, there are several kinds of vesting requirements that you need to meet, including: 

• Working at your company for anywhere between three to five years
• Meeting specific company goals like marketing a new product or meeting quota
• Signing up for accelerated vesting in case your company goes bankrupt

Qualifying for a Loan

You might be wondering: how can I use my restricted stock units to qualify for a loan? We got your back. For starters, you have to choose a loan that will actually let you apply your restricted stock units toward it. 

In case you didn't know, there are a couple of different kinds of loans that you can choose from. As a matter of fact, the most popular loan programs that you might qualify for are called "Choice" and "Select." 

While the details may vary, the guidelines between each loan program are generally the same. Here are a few rules that your restricted stock units have to follow no matter which lender you go with: 

• You can only use your restricted stock units to qualify for a loan if you've received a consistent income for at least two years, proven by W-2s and pay stubs.
• Your vesting schedule must prove that your income will continue for at least three years at a similar rate of the last two years, which is also proven by W-2s and pay stubs.
• You can calculate the average amount of income you've received from restricted stock units over the last two years.

But wait - there's more. If you're trying to apply for a loan that accepts restricted stock units, you also have to make sure that:

• Your continuance is based upon your vesting schedule using the stock price for the last year.
• Your qualifying income can be supported by future vesting using the same stock price that was utilized to qualify for your loan. 
• Your vested restricted stock units haven't been used for reserves yet.

Met all of your above requirements? Congratulations. Now, it's time to break down the lingo that you need to know before filling out your loan application!

Breaking Down the Lingo

Can we be totally honest with you? The hardest part about filling out a home loan application is breaking down the lingo. So, that's why we thought that it would be a great idea to give you a head start in the "financial terms" department. 

We've already talked about restricted stock units, but did you know that there are two types of vesting schedules, including: 

• Graded vesting schedules
• Cliff vesting schedules

What's the real deal with graded vesting schedules? First things first, graded vesting schedules are designed to give you a specific amount of your total stock to vest every year.

For instance, if you're given 4,000 stocks on June 1, 2018 with a vesting period of four years, you can expect to vest 25% every year. Sounds simple enough, right? Now that you’ve got that, let's move onto cliff vesting schedules.

To keep it simple, you know if you have a cliff vesting schedule if you get 100% of your RSU stocks at the same time, like when you've met the employment tenure or performance goal requirement. Besides the time frame, cliff vesting schedules and graded vesting schedules are very similarly structured.

On the hunt for a mortgage lender in Seattle? We can't emphasize this enough: it doesn't hurt to ask your real estate agent for recommendations first!

Filing Taxes on Restricted Stock Units 

Here comes the fun part: filing taxes on restricted stock units. If you're not oozing with excitement already, you should be. All jokes aside, we've got to admit that restricted stock units are technically considered as a form of income.

That being said, you're going to need to file taxes on your restricted stock units just like any other American taxpayer generating income. In other words, your income will be taxed at the market value of your stocks when they've been vested. 

According to the graded vesting schedule example that we used above, that means that you would be taxed for $20,000 in the first year, $25,000 for year two, and so on. Of course, your vested restricted stock units will be shown on your W-2, tax return, and your paycheck too.

Meanwhile, those that are already on a cliff vesting schedule should expect to receive all of their stocks at the exact same time. Instead of being taxed over a period of several years, you'll be taxed all at once. Similar to graded vesting schedules, your vesting will appear on one W-2 and one paycheck!

Choosing a Streamlined Method

Has your corporation given you more than a few options to choose from? While it's easy to get overwhelmed by all of your choices, we suggest that you choose a streamlined method. All you have to do is give a share of your vested stock back to your employer.

In that way, your company will be able to take care of the taxes on your restricted tax units for you. How so? By putting the money that you gave them into a net-settlement program that will handle your organization's payroll tax deposit. 

Here's another word of advice: if you're planning to sell your restricted stock units in the future, then you should be prepared to pay something called "capital gains tax." This is based on any increase in the value of your shares from the time they were originally given to you.

For example, if your original restricted stock units were valued at $25 per share at the time of vesting, you could potentially sell 1,000 shares at $30 per unit one year later. If that's the case, then you'll eventually have to pay a capital gains tax on your $30,000 profit margin. 

Curious about how much money you need to buy a home? We highly recommend that you research everything you need to know about down payments before you place a bid!

Buy Your Home With Restricted Stock Units 

Question: if your company has given you restricted stock units, why not use them to buy your home? For potential homeowners in the Seattle area, there's no better time than now to buy a house. With our guidance, qualifying for a loan should be a breeze.

So go ahead - get a free instant quote on your home loan in minutes.

Check out our frequently asked questions or contact us for a quick consultation.

Happy home buying!