Mortgages and RSUs

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Huygens
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Mortgages and RSUs

Post by Huygens » Sun Jul 14, 2019 10:57 am

My spouse and I are considering buying a single-family home in the Bay Area, and I've just started to explore the mortgage preapproval process. We both work for megacorps, and RSUs play a large part in our compensation. Approximately 65% of our gross income comes from RSUs.

I've read conflicting reports about whether underwriters count RSUs as income, how this affects the debt-to-income (DTI) ratio calculation, and so on. I was curious if any Bogleheads had experience with this recently.

If you applied for a loan, and RSUs were considered:
  • Was there a limit to how much RSU income was considered? I've read that no more than 35% of total income may come from RSUs.
  • At what stock price? 52 week low?
  • What historical and forward-looking data was required? Past three years of RSU income and next three years vesting schedule?
Is it correct that there no standard guidelines or regulations for how lenders should account for RSUs? If so, does the policy vary from lender to lender? Are there any particular lenders to avoid or consider in this situation?

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Watty
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Re: Mortgages and RSUs

Post by Watty » Sun Jul 14, 2019 12:05 pm

Regardless of what the lenders will approve it would be very risky to depend on RSUs for paying the mortage payments for the next 15, much less 30 years.

You did not post the the details of your RSUs which is OK but it is very likely that you have gotten very lucky and gotten generous RSUs that also have gone up a lot in value since the stock market is at a new record high and many tech companies stocks have gone up even more dramatically. Over the length of the mortage there will also be bear markets where the value of the company stock in an RSU will go down dramatically before you can sell the stock. The demand for skilled people can also cool off and future RSU grants may not be nearly as generous.

You have likely gotten very lucky with a perfect storm, but you cannot depend on it lasting for a long time.

If you will not be able to afford to have the mortage paid off in the next few years with the RSUs then I would be very cautious about taking on a larger mortage than you can support with just your salary. (You may very well decide not to quickly pay off the house but that is another question, the key is being able to afford the house.)

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Huygens
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Re: Mortgages and RSUs

Post by Huygens » Sun Jul 14, 2019 12:46 pm

Watty wrote:
Sun Jul 14, 2019 12:05 pm
You have likely gotten very lucky with a perfect storm, but you cannot depend on it lasting for a long time.
Your conservatism is valid and warranted. I'm not old to have worked through the Dot Com boom and bust, but I'm aware the music could stop at any point. We try to live frugally, and we have about a 75% savings rate today. I expect to be able to comfortably pay the prospective mortgage if our total compensation drops to about 40% of what it is today. That being said, the Bay Area is extremely expensive, and buying a home here requires some amount of risk-taking and leverage.

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Watty
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Re: Mortgages and RSUs

Post by Watty » Sun Jul 14, 2019 1:20 pm

Huygens wrote:
Sun Jul 14, 2019 12:46 pm
I'm not old to have worked through the Dot Com boom and bust, but I'm aware the music could stop at any point.
It does not even require a bust.

It sounds like with RSUs many Bay Area salaries are five times as high(or more) than in most other parts of the country. If they eased off to be just three times as high that could have a big impact.

Huygens wrote:
Sun Jul 14, 2019 12:46 pm
We try to live frugally, and we have about a 75% savings rate today. I expect to be able to comfortably pay the prospective mortgage if our total compensation drops to about 40% of what it is today.
Sounds good.
Huygens wrote:
Sun Jul 14, 2019 12:46 pm
That being said, the Bay Area is extremely expensive, and buying a home here requires some amount of risk-taking and leverage.
I would add patience to that list.

I would guess that if you wait and save a few years then you will have accumulated enough that buying a house there might not be a stretch for you.

It could also be that Bay Area Housing keeps going up and that it never really becomes affordable for you. In that case you could move somewhere else. In probably 80% of the country you would be able to buy a McMansion for $500K in cash.

HEDGEFUNDIE
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Re: Mortgages and RSUs

Post by HEDGEFUNDIE » Sun Jul 14, 2019 1:25 pm

OP asked a specific question, which was not “should I buy a Bay Area house?”

Broadway2018
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Re: Mortgages and RSUs

Post by Broadway2018 » Sun Jul 14, 2019 1:40 pm

I just got approved for a mortgage where 40% of my income comes from RSUs. Many of these megacorps have preferred lenders who know how to include RSUs and understand the compensation.

My company had a list of programs and mortgage companies they partner with. Also a bonus was a discounted rate and no lending fees.

milktoast
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Re: Mortgages and RSUs

Post by milktoast » Sun Jul 14, 2019 1:43 pm

Bay Area means Jumbo mortgage. So the lending standards vary bank to bank.

For me, MUFG Union Bank was good to work with in the past. They carried my loan on their in-house portfolio, so their approval was more flexible.

For a large enough mortgage, you can do things like transfer your post-tax mutual fund holdings into an account that is forfeit upon non-payment. Be sure to read the terms on when they transfer the unsold shares back and when they can sell them (because that will cause you to experience an unplanned capital gain/loss).

But your experience will be unique. The underwriters will be more flexible with people who have long track records.

Edit: I should have stated the simple case first. Assuming you aren't doing anything odd, it's much easier. If you have 2-3 years of 1040 and W2, it will show the RSU income. And all you have to do is sign a form that you expect future income to look similar.

random_walker_77
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Re: Mortgages and RSUs

Post by random_walker_77 » Sun Jul 14, 2019 1:56 pm

OP, you might be interested in this post: https://www.mortgageblog.com/can-i-use- ... ification/

caveat emptor though -- banks will approve you for more than you should prudently borrow. Job loss, stock price declines, and recessions tend to correlate, so if your plan to avoid foreclosure precludes all 3 happening at the same time, think hard and think again...

Especially w/ high-growth tech stocks that warrant a P/E > 30, when a recession hits, the growth is gone so they tend to look more like P/E =15 stocks, and the "E" is now lower too, which can bring the price way down. When you work at a tech company, expect a roller-coaster stock, and be pleasantly surprised if it only goes up :twisted:

Also, if you change jobs, you might have a 1 yr cliff before new RSUs resume vesting. If your finances can't bridge that, (and a huge signing bonus might be presumptuous during a recession) then that's also a concern.

drk
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Re: Mortgages and RSUs

Post by drk » Sun Jul 14, 2019 2:12 pm

Broadway2018 wrote:
Sun Jul 14, 2019 1:40 pm
I just got approved for a mortgage where 40% of my income comes from RSUs. Many of these megacorps have preferred lenders who know how to include RSUs and understand the compensation.

My company had a list of programs and mortgage companies they partner with. Also a bonus was a discounted rate and no lending fees.
^ This.

In my experience, other banks are happy to consider RSU income once you've received it for two years.

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mrspock
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Re: Mortgages and RSUs

Post by mrspock » Sun Jul 14, 2019 3:35 pm

My advice is to count either half, or the actual dollar value they use each year which is then converted into shares. Zero out or discount the growth.

I’d also really consider trading off commute, or size before going down the RSU route. While the Bay Area is expensive, the variance is extremely high, people here massively overvalue commute and schools to their own financial peril and even mental health of their kids.

Places like East bay, Santa Cruz, San Jose, Pacifica are way under valued IMO, and places like San Mateo, Palo Alto, Sunnyvale and Menlo Park massively overvalued. Everyone talks about the great schools, but never about the people they pay to sit in chairs by railroad crossings to prevent kids from committing suicide. Hmmmm, something is wrong there.

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Huygens
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Re: Mortgages and RSUs

Post by Huygens » Sun Jul 14, 2019 9:50 pm

Broadway2018 wrote:
Sun Jul 14, 2019 1:40 pm
I just got approved for a mortgage where 40% of my income comes from RSUs. Many of these megacorps have preferred lenders who know how to include RSUs and understand the compensation.

My company had a list of programs and mortgage companies they partner with. Also a bonus was a discounted rate and no lending fees.
This is a helpful suggestion, thanks. I'll see if either of our employers have such an arrangement.

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Huygens
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Re: Mortgages and RSUs

Post by Huygens » Sun Jul 14, 2019 9:53 pm

random_walker_77 wrote:
Sun Jul 14, 2019 1:56 pm
OP, you might be interested in this post: https://www.mortgageblog.com/can-i-use- ... ification/
Yes, I searched for this subject and came across that blog post. I wasn't sure how credible a source it was. It looked more like content from an SEO-farm, but I could be wrong.

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Huygens
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Re: Mortgages and RSUs

Post by Huygens » Sun Jul 14, 2019 9:59 pm

mrspock wrote:
Sun Jul 14, 2019 3:35 pm
My advice is to count either half, or the actual dollar value they use each year which is then converted into shares. Zero out or discount the growth.
I have my own conservative estimates as to what these RSUs will be worth in the future. What I'm trying to understand however is how underwriters will calculate this, who won't care about my arbitrary estimations.
mrspock wrote:
Sun Jul 14, 2019 3:35 pm
I’d also really consider trading off commute, or size before going down the RSU route. While the Bay Area is expensive, the variance is extremely high, people here massively overvalue commute and schools to their own financial peril and even mental health of their kids.

Places like East bay, Santa Cruz, San Jose, Pacifica are way under valued IMO, and places like San Mateo, Palo Alto, Sunnyvale and Menlo Park massively overvalued. Everyone talks about the great schools, but never about the people they pay to sit in chairs by railroad crossings to prevent kids from committing suicide. Hmmmm, something is wrong there.
I grew up in the Bay Area and have lived here most of my life. I'm aware of the various tradeoffs. Moving is not a viable option at this time as another commenter suggested.

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mrspock
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Re: Mortgages and RSUs

Post by mrspock » Mon Jul 15, 2019 12:32 am

Huygens wrote:
Sun Jul 14, 2019 9:59 pm
mrspock wrote:
Sun Jul 14, 2019 3:35 pm
My advice is to count either half, or the actual dollar value they use each year which is then converted into shares. Zero out or discount the growth.
I have my own conservative estimates as to what these RSUs will be worth in the future. What I'm trying to understand however is how underwriters will calculate this, who won't care about my arbitrary estimations.
It’s pretty much irrelevant what they value them at. They will almost certainly approve you to an amount which far exceeds what is financially prudent, as this is in THEIR best interests (commissions).

If the number they arrive at is lower than what you feel you can afford.... think harder :) .

HEDGEFUNDIE
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Re: Mortgages and RSUs

Post by HEDGEFUNDIE » Mon Jul 15, 2019 11:54 am

Just heard back from my mortgage banker. RSUs are only counted when you can show them 2 years in the past and 3 years into the future. When they do qualify, they qualify at 100%.

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Huygens
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Re: Mortgages and RSUs

Post by Huygens » Mon Jul 15, 2019 10:06 pm

HEDGEFUNDIE wrote:
Mon Jul 15, 2019 11:54 am
Just heard back from my mortgage banker. RSUs are only counted when you can show them 2 years in the past and 3 years into the future. When they do qualify, they qualify at 100%.
Exactly what I was looking for. Thank you!

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