Using bonus income when applying for a home loan

If your compensation plan includes bonuses, you may be able to use this as an additional source of income when qualifying for a home loan.

Similar to overtime income, in order to be considered for qualifying, lenders want to see a regular history of bonuses being received over a period of two years or more.

Lenders will need to see documentation supporting your bonus income on paystubs, W2s, and tax returns.

They will also want to know there’s a likelihood your bonuses will continue. The likelihood is typically defined on a written verification of employment from your company.

If you haven’t been receiving bonus income for at least one year, it probably can’t be given full value for your loan approval.

How restricted stock unit income be used for a mortgage

Mortgage lenders have specific guidelines for would-be homeowners who want to use restricted stock income toward their mortgages.

The lender will need to see a vesting schedule, as well as documentation outlining the terms and conditions of the restricted stock agreement.

Similar to bonus income, you will need to have at least two consecutive years of restricted stocks given and vested with your current employer. This should be documented via pay stubs, W2s, and tax returns.

In addition, the vesting schedule must show the RSU income will continue for at least three years at a similar level to the previous two years.

Some additional requirements for restricted stock income include:

• The company granting restricted stock must be publicly traded
• No more than 35% of income can be comprised of restricted stocks
• Vested restricted stock units and stock options usually cannot be used for reserves if they are being used for qualifying income

When considering future income from restricted stock, your lender may use the average stock price for the previous year instead of basing it on forecasted gains.

Some lenders may opt to average the restricted stock income from the last two years and base future earnings on that figure.

Calculating RSU and bonus income

RSU and bonus income can help you qualify for more home than you may otherwise be able to buy.

Calculating bonus income is fairly straightforward. Lenders will typically take the amount of bonus income received over the past two years, and divide it by 24 months to arrive at a monthly ‘income.’

But income from RSUs can be more complicated, as the actual value of your stock units will vary based on your company’s stock prices.

The share price of a stock may change several times a day. Due to the volatility of stock prices, lenders typically use a 52-week average stock price to calculate your income from the RSU.

Here’s an example of how RSU income might be calculated for a home purchase:

Five years ago, Lucas was hired with a compensation package of $90,000 in salary and a grant of 3,000 RSUs that would become vested after four years.

When he applies for a home loan, the 52-week average stock price is $15.

That means, for qualifying purposes, Lucas’ monthly income from the RSUs is $1,875 (3000 shares multiplied by $15 and divided by 24 months).

This puts his total qualifying income at $112,500. ($90,000 salary + $22,500 RSU income = $112,500).

With an extra $22,500 being used to qualify, Lucas’ purchase power is a whopping 25% higher than it would have been if he qualified based on salary alone.

Note: some lenders may use only 75% of the current share price as a conservative estimate of the value.

Other factors that impact your mortgage application

Remember, income isn’t the only thing that counts on your loan application. Lenders will also take a close look at:

• Credit — While some lenders will still go down to 580, most lenders want to see credit scores of at least 620. The higher your credit score, the lower your mortgage rate — and the more home you’ll be able to afford
• Debt-to-income ratio — Debt-to-income ratio or ‘DTI’ compares your monthly income with your monthly debt obligations (auto loan, credit cards, student loans, etc.) The more pre-existing debt you have, the less a mortgage lender will be willing to lend to you
• Savings or ‘reserves’ — Lenders want to see cash reserves when you buy a home. That’s money left over in the bank after your down payment and closing cost have been paid
• Mortgage rate — The interest rate for which you qualify will determine your mortgage payment and home buying budget. Shop and compare rates to make sure you’re getting a competitive rate

These are just some of the factors considered by most mortgage lenders.

Different lenders have varying rules for what exactly can be used to qualify for financing.

The bottom line

Bonuses and RSU income can give your home buying budget a huge boost.

This is especially helpful for home buyers hoping to buy high-priced real estate in areas like San Francisco, New York, and Seattle.

However, it can be hard to find lenders that will count RSUs and bonuses as a source of income. It’s even harder to find a lender that will maximize the amount with which you can qualify.

Therefore you should be sure to explore all of your options. When you’re comparing rates, also screen lenders by asking how they calculate different kinds of income.

It might help to ask coworkers in a similar situation to yours what lenders they’ve had success working with.

Good luck, and happy house hunting!