What is an ‘RSU’? If you have them, how do they affect your finances and ability to get a mortgage in Seattle?
Maybe you are being offered RSUs at a new job and want to know how they will impact your ability to buy or refinance a home. Maybe you already have them, but don’t really understand them. Before you make an offer on a home or count on refinancing to cash out your equity or try to lower your house payments, it’s smart to know how they work. Plus, be sure you understand how mortgage lenders will classify them before diving into the mortgage process.
What Is A RSU?
‘RSU’ stands for Restricted Stock Unit.
Restricted stock units are often offered to, or held by employees of startups and young tech companies.
It is important to note that RSUs are not stocks, shares or employee stock options.
A restricted stock unit is a promise that an employer will give an employee or other party stocks at a future date, providing the specified criteria or achievements and tenure are met.
This can be performance based and time based. RSUs are typically vested over time. Meaning your units are not converted into stock by your employer until some time. Often in parts. You may get 25% after a year. Another 25% after the second year, and so on.
Why Do Employers Use RSUs?
There are three main reasons that employers offer RSUs to their hires.
1. To Minimize Cash Flow Expenditures
Startups often don’t start out with a lot of money. They can’t pay competitive salaries in relation to big corporations to lure great talent. They don’t offer the same reputation or security. They use alternative forms of compensation like this to sweeten the job offer. They may offer you some small salary or performance based pay in addition to RSUs, stock options or shares.
2. To Maintain Stronger Balance Sheets
To survive and grow startups need to borrow and raise money from investors. Investors and lenders don’t want to loan to losing companies who have too much overhead and little if any profit. Arranging compensation in this way improves the balance sheet and profits and makes it much easier to raise equity and debt financing for the company.
3. To Motivate Workers To Perform
How else are you going to convince highly qualified workers with their choice of comfy employers to come work with your little startup, with no security and probably no benefits? How are you going to motivate them to work 100 hours a week and through nights, weekends and holidays, for a fraction of the pay of a 9-5 at Google or Apple? RSUs can be pitched as big windfalls that can one day be worth millions of dollars. It could be if the company becomes the next Facebook. It costs nothing for employers to one day promise to give someone shares of just their idea. If the company goes up in value everyone wins. It is doesn’t it didn’t cost the employer anything.
RSUs & Your Finances
How do RSUs work as a part of your finances?
They could one day be worth a substantial amount of money. Yet, they may be worthless at the beginning.
RSUs could offer supplemental income when they become vested, if the stock offers dividends. Or at least once you get ownership of the shares they may have liquid value and can be cashed in.
There are some potential downsides that RSU recipients should be aware of before and after vesting.
- They can be highly volatile in value, and can go down to zero
- They can be highly taxed when vested
- You typically have little to no control over their value and performance
- They remain a captive promise until they are actually vested
- They mean both your income and investments are reliant on this company succeeding
RSUs & Your Housing Payments
RSUs may offer the promise of substantially better finances in the future. That could be a lump sum or ongoing dividends and extra income.
That doesn’t always help with your housing payments today. So, you may want to opt for a lower housing payment now, and upgrade when you actually realize the benefits of your RSUs.
This could mean being more conservative with the home you buy now and scaling up later. It could be choosing a lower rate ARM mortgage loan or interest only home loan now, and switching to a fully amortizing fixed rate mortgage later.
Some other alternatives may be to sell your vested stock and make a larger down payment now, or to put that money into a more secure fixed income producing investment which may gain you more credit with mortgage underwriters.
Can You Use RSUs To Qualify For A Mortgage?
Yes, you can.
Many traditional banks still haven’t modernized their lending processes and may not recognize these assets. Yet, there are new lenders and mortgage brokers which can connect you with more up to date loan programs that will allow you to use your income and future assets from these units to help qualify for a larger home loan and even jumbo mortgage loans.
The most important thing to understand here is how mortgage lenders credit and value RSUs. Like many other types of assets from stocks to rental income, you will only be given credit for a portion of your RSUs.
They have to take into account:
- You may never convert to stocks
- Stock values may take a dive or the company could go bankrupt
- These may not be liquid assets
- The additional taxes and withholdings that can be taken out of RSUs
- Your history of receiving income from your private stock holdings over the past 2 years
They may give you credit for 75% of your RSU value. However, this can change during crisis times when values are declining.
In addition to your other paperwork, expect to provide your Seattle mortgage lender with a copy of your RSU agreement as well as any W2s or other payroll documents which show they have been vested.