When applying for a mortgage loan, some lenders will consider the would-be borrower’s restricted stock as part of their income and some will not. (Photo by Helloquence on Unsplash).

Michaela Phillips, Guaranteed Rate, Inc.

Michaela Phillips, Guaranteed Rate, Inc.

Many large companies, like Google, Ball Aerospace, Wells Fargo and the like, offer employees additional compensation in the form of restricted stock. When applying for a mortgage loan, some lenders will consider the would-be borrower’s restricted stock as part of their income and some will not. Let’s take a closer look at restricted stock income and how it can help the procurement of a home loan.

What is Restricted Stock Income?

Restricted stock, also referred to as letter stock and section 1244 stock, are unregistered shares given as compensation. This type of stock vests over time, or when certain milestones are met by the employee. On occasion, restricted stock is offered in lieu of stock options because the company wants to prevent the offloading of stock during a merger, or keep founding employees in the company during initial start-up years. The income from restricted stock is included on the employee’s W2 as taxable wages; if an 83(b) election is made, the value of the restricted stock will be reflected as income on the W2.

Using Restricted Stock Income to Secure a Home Loan

Lenders set forth certain stipulations for potential borrowers interested in securing a home loan with restricted stock income. The company granting restricted stock must be a publicly traded company and no more than 35% of the income can be comprised of restricted stocks.

The lending company will also need to see documentation of the vesting schedule. The individual will need to have at least two consecutive years of restricted stocks given and vested with the same company. The bank also needs to see documentation pertaining to the Restricted Stock Agreement delineating the vesting schedule, terms, and conditions.

When considering future income from restricted stock, the underwriter will often 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.

Who Allows Restricted Stock Income for Loans

Freddie Mac will allow the use of restricted stock income while Fannie Mae will not. When using restricted stock income, it’s important to be prepared before applying for a mortgage. The restricted stock agreement, W-2s for the previous two years, balance of vested and unvested restricted stock, and bank statements will be needed.

More importantly, jumbo lenders will also allow restricted stock to be included as part of income when applying for a loan. Often times, would-be borrowers who are compensated with restricted stock income require jumbo loans that Freddie Mac won’t provide. Nationally, jumbo lenders provide loans over $484,350. In Denver County, those loans are even higher at $561,200 and again higher in Boulder at $626,750.

If you’re an employee who received restricted stock options as compensation, you can use the income generated from this to apply for a home loan. It just takes a little extra leg work and working with the right lender.

By Michaela Phillips. Michaela is the Vice President of Mortgage Lending at Guaranteed Rate, Inc. Contact Michaela at 303.579.5517, e-mail michaela@michaelaphillips.com or visit michaelaphillips.com.
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