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Ask an RU: Underwriting Loans with Restricted Stock Units as Income

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[Last updated February 2025; originally published July 29, 2021]

It’s an ordinary day of underwriting mortgage files and then you see it – a restricted stock unit (RSU) listed as income for the borrower. How will you handle this type of income?

Depending on where you work, this may or may not be a common scenario you run into… but it may pop up! Regardless, our very own Marilyn Richter, Regional Underwriter, dives into restricted stock units, how they’re taxed, and how the GSEs treat RSUs.

What is a Restricted Stock Unit?

A restricted stock unit is a form of compensation issued by an employer to an employee in the form of company shares. RSUs are issued to an employee through a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with his/her employer for a particular length of time.

RSUs give an employee interest in company stock but they have no tangible value until vesting is complete. Upon vesting, they are assigned a fair market value and are then considered income, a portion of which is withheld to pay income taxes. The employee receives the remaining shares and can sell them at his/her discretion.

Understanding Restricted Stock

Restricted stock as a form of executive compensation became more popular after accounting scandals in the mid-2000s as a better alternative to stock options. At the end of 2004, the Financial Accounting Standards Board (FASB) issued a statement requiring companies to book an accounting expense for stock options issued.

Now, RSUs are granted to all levels of employees. RSUs also allow a company to defer issuing shares until the vesting schedule is complete, which helps delay the dilution of its shares.

Taxation and Restricted Stock Units

With RSUs, a recipient is taxed when the shares are delivered, which is almost always at vesting. The taxable income is the market value of the shares at vesting. The RSU recipient will have compensation income subject to federal and employment tax (Social Security and Medicare) and any state and local tax. That income is subject to mandatory supplemental wage withholding. Withholding taxes, which for U.S. employees appear on Form W-2 along with the income, include the following:

  • Federal income tax at the flat supplemental wage rate, unless your company uses your W-4 rate
  • Social Security (up to the yearly maximum) and Medicare
  • State and local taxes, when applicable

A company may offer a choice of ways to pay taxes at vesting, or it may use a single mandatory method. The most common practice is taking the amount from the newly delivered shares by surrendering stock back to the company. This holds or “tenders” shares to cover the taxes under a net-settlement process, and company cash is used for the payroll tax deposit.

Agency Guidelines on Restricted Stock Units

The guidelines around using restricted stock units as qualifying income are not terribly complex, but we’ve outlined some key takeaways below.

Freddie Mac Guidelines

When qualifying a loan for sale to Freddie Mac, you’ll first want to determine if the restricted stock units are subject to either performance-based vesting provisions or time-based vesting provisions.

For performance-based vesting provisions, you’ll need a history of two years of consecutive receipts, proof that the payment is likely to continue for at least the next three years, and sufficient documentation like paystubs and W-2s.

For time-based vesting provisions, you’ll need a one-year history of receipt, proof the payment is likely to continue for the next three years, and sufficient documentation for proof of payment.

See the full breakdown of performance-based vs. time-based vesting RSU guidelines, available via Section 5303.1, in the charts below.

Section 5303.1 – Employed Income

Effective 11/08/2024

(D) Restricted stock (RS) and restricted stock units (RSUs)

(I) RS and RSU subject to performance- based vesting provisions

RS and RSU subject to performance-based vesting provisions
Topic Stable monthly income requirements
History of receipt
  • Two years, consecutiveException: A history of less than two years, but not less than one year, may be acceptable. Refer to income history and stability requirements and guidance in Section 5303.1(d)(ii), above.
  • To be considered for history of receipt, RS and RSU used for qualifying must have vested and been distributed to the Borrower from their current employer, without restriction
Continuance Must be likely to continue for at least the next three years
Documentation

All of the following:

  • YTD paystub(s) documenting all YTD earnings, including payout(s) of RS or RSU
  • W-2 forms for the most recent two calendar years
  • 10-day PCV

Or all of the following:

  • Written VOE documenting all YTD earnings (including payout(s) of RS or RSU) as well as earnings for the most recent two calendar years
  • 10-day PCV

Employment and income verifications obtained through a third-party verification service provider as described in Section 5302.3 are permitted, provided that the documentation clearly identifies and distinguishes the payout(s) of RS/RSU.

The Mortgage file must also include the following additional documentation:

  • Evidence the stock is publicly traded
  • Documentation verifying that the vesting provisions are performance-based (e.g., RS and/or RSU agreement, offer letter)
  • Vesting schedule(s) currently in effect detailing past and future vesting
  • Evidence of receipt of previous year(s) payout(s) of RS/RSU (e.g., year-end paystub, employer-provided statement paired with a brokerage or bank statement showing transfer of shares or funds) that must, at a minimum, include the number of vested shares or its cash equivalent distributed to the Borrower (pre-tax)
Calculation Based on the form in which vested RS or RSU are distributed to the Borrower (i.e., as shares or its cash equivalent), the Seller must use the applicable method(s) below to calculate the monthly income:

  • RS or RSU distributed as shares

    Multiply the 52-week average stock price as of the Application Received Date by the total number of vested shares distributed (pre-tax) to the Borrower in the past two years, then divide by 24.

    Example: If 200 vested shares were distributed (pre-tax) in the past two years and the 52-week average stock price as of the Application Received Date is $10, multiply 200 x $10 then divide by 24= $83.33 monthly income.

  • RS or RSU distributed as cash equivalent

    Use the total dollar amount distributed (pre-tax) from the cash equivalent of vested shares in the past two years and divide by 24.

(II) RS and RSU subject to time-based vesting provisions

RS and RSU subject to time-based vesting provisions
Topic Stable monthly income requirements
History of receipt
  • One year
  • To be considered for history of receipt, RS and RSU used for qualifying must have vested and been distributed to the Borrower from their current employer, without restriction
Continuance Must continue for at least the next 3 years
Documentation

All of the following:

  • YTD paystub(s) documenting all YTD earnings, including payout(s) of RS or RSU
  • W-2 form for the most recent calendar year
  • 10-day PCV

Or all of the following:

  • Written VOE documenting all YTD earnings (including payout(s) of RS or RSU) as well as earnings for the most recent calendar year
  • 10-day PCV

Employment and income verifications obtained through a third-party verification service provider as described in Section 5302.3 are permitted, provided that the documentation clearly identifies and distinguishes the payout(s) of RS/RSU.

The Mortgage file must also include the following additional documentation:

  • Evidence the stock is publicly traded
  • Documentation verifying that the vesting provisions are time-based (e.g., RS and/or RSU agreement, offer letter)
  • Vesting schedule(s) currently in effect detailing past and future vesting
  • Evidence of receipt of previous year’s payout(s) of RS/RSU (e.g., year-end paystub, employer-provided statement paired with a brokerage or bank statement showing transfer of shares or funds) that must, at a minimum, include the number of vested shares or its cash equivalent distributed to the Borrower (pre-tax)
Calculation Based on the form in which vested RS or RSU are distributed to the Borrower (i.e., as shares or its cash equivalent), the Seller must use the applicable method(s) below to calculate the monthly income:

  • RS or RSU distributed as shares

    Multiply the 52-week average stock price as of the Application Received Date by the number of vested shares distributed (pre-tax) to the Borrower in the past year, then divide by 12.

    Example: If 50 vested shares were distributed (pre-tax) in the past year and the 52-week average stock price as of the Application Received Date is $10, multiply 50 x $10 then divide by 12 = $41.67 monthly income.

  • RS or RSU distributed as cash equivalent

    Use the total dollar amount distributed (pre-tax) from the cash equivalent of vested shares in the past year and divide by 12.

Fannie Mae Guidelines

Section B3-3.1-09 – Restricted Stock Units and Restricted Stock Employment Income

Effective 05/01/2024

FNMA’s policy on vested RSUs as income is outlined in Section B3-3.1-09, Other Sources of Income. The following table provides verification requirements for restricted stock income.

Verification of Restricted Stock Income
To be used as qualifying income, the restricted stock must have vested and been distributed to the borrower without restrictions.

For performance-based awards: A minimum history of 24 months restricted stock income from the current employer is recommended. Restricted stock income received for 12 to 24 months from the current employer may be considered as acceptable income if there are positive factors to offset the shorter income history such as

  • future vesting equal to or greater than previous vesting and that will continue for at least 24 months; or
  • restricted stock income received for the previous 5 years from any employer.

For time-based awards: A minimum history of 12 months restricted stock income from the current employer is required.

The lender must confirm continuance of income per Continuity of Income in B3-3.1-01, General Income Information.

Note: Sign-on bonuses received in the form of restricted stock that vest over any length of time cannot be considered by the lender as qualifying income.
The lender must document all the following:

  • evidence stock is publicly traded;
  • current vesting schedule reflecting past and future vesting;
  • brokerage or bank statement showing receipt of previous year(s) distribution of restricted stock and, at a minimum, the number of vested shares or cash equivalent; and
  • a completed Request for Verification of Employment (Form 1005) that shows restricted stock distributions, or the borrowers recent paystub showing receipt of restricted stock income and IRS W-2 forms covering the most recent two-year period.
The calculation method for restricted stock income will vary depending on whether payment is made is shares or cash.

For income paid in shares:

  • (200-Day Moving Average of share price x total number of distributed vested shares (pre-tax) in most recent 24 months) / 24 months

For income paid in cash:

  • Total cash distributed (pre-tax) equal to the total value of vested shares in the most recent 24 months / 24 months

Note: When the borrower has a history of income ranging from 12-24 months, the lender may use the actual number of months the borrower has received the income rather than 24 months.

See Variable Income in B3-3.1-01, General Income Information, for additional information about calculating variable income.

 

To learn about employment-related assets as qualifying income, access the selling guides for Freddie Mac and Fannie Mae.

Enact Guidelines on Restricted Stock Units

When working with Enact, know that we will follow agency guidelines on a DU/LPA loan with Approve/Eligible or Accept/Eligible recommendations.

Manually underwritten loans are subject to our standard guidelines in Section 7.11.  Enact does not have a stated policy regarding restricted stock units, therefore you should refer to the GSEs’ guidelines on RSUs.

Be sure to check with your investor to see if they have any investor specific requirements on RSUs.

If you have any questions about how to handle this income type, feel free to contact our Regional Underwriting Team or contact your Sales Representative today!

More Ways We Can Help

When working on loans with this income type, your Enact MI team has got you covered. Our Regional Underwriting Team is available to assist you Monday-Friday 8am to 8pm ET at 800-444-5664 option 2.

Be sure to make the most of your MI experience, too. Please explore our many underwriting resources and underwriting tips for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.

 

Source:  Marilyn Richter is a Regional Underwriter for Enact.

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