March 2, 2022

What Are Restricted Stock Units (RSUs)? Buy a House With Them!

How can RSU mortgage lenders help you refinance or buy your next home in Tacoma?

If you have RSUs or are being offered them with a new job, it is smart to know how they can impact your ability to finance a home. 

Before you make a purchase offer on a house in Tacoma, or count on them to help you qualify for refinancing your mortgage to cash out home equity or try and lower your interest rate and house payments, it pays to know how RSUs are viewed by Tacoma mortgage lenders. Be sure that you understand how underwriters will classify your RSUs before jumping into the mortgage application and home buying process.

What Is A RSU?

‘RSU’ is an abbreviation for Restricted Stock Unit. 

Restricted stock units are frequently offered to, or owned by employees of startup companies and early stage tech companies.

It’s important to understand that RSUs are not the same as other stocks, company shares or traditional employee stock options

Restricted stock units are a promise that a company will give a certain employee or other key person stocks in that company at a future time. At least providing that they have met specific criteria, metrics and tenure requirements.

These requirements can be either or both time and performance based. RSUs are commonly vested over a period of time. Meaning that your stocks units will not be converted into real stock by the employer until some time in the future. This often happens in parts, and over a period of years. For example; you might get 25% after year one, and an additional 25% after year two, etc. 

Why Employers Use RSUs

These are three of the most common reasons that companies offer RSUs to hires, contractors, and advisors.

1. Minimizing Cash Flow Expenditures

Startup companies don’t typically start out with a ton of money. They normally cannot afford to pay competitive salaries compared to bigger corporations to attract and secure the best talent. They simply can’t offer the same reputation or security as a multi-billion dollar competitor which has been around for 50 years already. So, they utilize alternative methods of compensation, like RSUs to enhance their offer. They might include some small base salary, performance based pay, and perks, in addition to RSUs, equity shares, and stock options.

2. Maintaining Stronger Balance Sheets

To survive financially and keep growing, startups must borrow and raise money from various lending sources and equity investors. Lenders and investors don’t want to invest in or extend more credit to companies with stock bases that are too diluted and complicated, especially when they probably still very lean on revenue and profit. Structuring compensation this way improves the strength of a balance sheet and other financials, making it far easier to attract equity funding and debt financing from preferred parties. 

3. Motivating Workers To Perform

How else would you draw the best talent in your industry to leave their comfy jobs, with more stable companies, with guaranteed paychecks and seniority, all to come work at your new unproven venture, with high chances of failing, and little regular pay to offer? You may not only offer zero job security, but little in the way of benefits either.

Even if you can convince them to jump ship, how will you motivate them to work hard? They may be getting paid a lot less, and be expected to work 100 hours a week, including nights, weekends, holidays, and more. 

RSUs can be used to pitch potential for big financial windfalls, which may be worth millions of dollars one day. If the company becomes the next Facebook or Apple they could become millionaires. It doesn’t really cost employers anything to promise someone shares in just their idea, which might be worth something one day. If the company does survive and becomes valuable, everyone wins, even if it didn’t cost the employer anything.

Your Finances & Your RSUs

How do RSUs work in your finances and getting financing?

RSUs may be worth a substantial amount of money one day. Yet, they are often virtually worthless at the start of a brand new pre-funding company. 

When they are vested, RSUs could provide supplemental income, if that stock offers dividends. Once you actually get ownership of those shares they may also have liquid value in the future, and could be cashed in.

Some of the potential downsides RSU recipients ought to be aware of ahead of, and after vesting include:

  • Values can be highly volatile, and could become worth nothing
  • They may be highly taxed when they are vested
  • You probably have little to zero control over RSU value and performance
  • It’s just a captive promise until actually vested, and converted to cash
  • Both your income and investments rely on this company succeeding

Your Housing Payments & RSUs

RSUs promise the possibility of substantially better finances in the future. This could be a lump sum payout, or ongoing dividends with extra monthly or quarterly income.

This of course doesn’t always help covering your house payments today. With this in mind, you may need to opt for a lower house payment now, and then upgrade your home when you actually get to touch the value of your RSUs.

This may mean being more conservative with the Tacoma home you choose to buy now and then scaling up later. Or it could be choosing a lower interest rate adjustable rate mortgage loan, or an interest only home loan today, and then refinance to a fully amortizing fixed rate mortgage loan later on. 

Other alternatives may include selling your vested stock to make a bigger down payment today. Or to put that cash into more secure, fixed income producing investments, which can justify more credit with lenders and mortgage underwriters.

Using RSUs To Qualify For A Tacoma Mortgage Loan

You can use your RSU to help finance a home in Tacoma, WA.

A lot of traditional main street banks and lenders still haven’t updated and modernized lending and underwriting processes to adjust for today’s methods of compensation and working, like RSUs. They might not recognize these as assets.

Fortunately, there are new mortgage lenders and Tacoma mortgage brokers which can provide  you with more modern home loan programs that allow use of your income and future stock assets from these units to contribute toward qualifying for a bigger home loan now. 

What’s most important to understand here is how will mortgage lenders credit and assess the value of your RSUs. As with most other types of assets, like stocks or rental income, you will probably only be credited for a percentage of your RSUs.

Lenders must take into account:

  • That you may never convert them to actual stocks
  • Stock values can take a dive or the company may even go bankrupt
  • RSUs may not be liquid assets
  • Additional taxes and withholdings can be subtracted from RSUs
  • The history of you receiving income from private stock holdings during the past 2 years

You may get credit for 75% of your RSU value. Though, this can change during economic crises when values are declining. 

In addition to your other documents, expect to provide your Tacoma mortgage broker with copies of your RSU agreements, plus any W2s, paychecks, or documents showing they have been vested.

About the author 

Joe Tafolla

Helping Pacific Northwesterners buy their dream homes for over 15 years. Founder of Tacoma Mortgage Brokers and Seattle's Mortgage Broker and author of Homeownership Simplified: The Truth about ZERO Down.

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