Buying a House With RSUs and ESPP Shares
Purchasing a home is, for many, one of life’s major accomplishments. With housing prices so steep and mortgage rates so high, it’s more difficult than ever to buy a home.
Complicating matters further, if you happen to work in tech, you’re likely to live in a higher-priced area and have a company compensation package that includes equity in the form of RSUs, ESPPs, etc. Unfortunately, these forms of company equity are sometimes foreign to mortgage lenders.
The purpose of this article is to answer important questions about how RSUs and ESPP shares can affect the home buying process. We’ll address the questions listed below:
How are RSUs looked at by mortgage companies?
How are ESPP shares looked at by mortgage companies?
How should I view my RSUs when deciding how much house to buy?
Should I sell RSUs or ESPP shares to purchase a house?
What’s the best way to save for a house when accumulating RSUs and ESPP shares?
By the end of this article, you should have a better idea how your RSUs and ESPP shares affect both the home-buying process and how they should influence your decision-making.
How are RSUs looked at by mortgage companies?
It’s a lender’s job to vet whether or not you will be able to pay back the loan you’re applying for, so lenders can have strict rules regarding RSUs and the particular stage your RSUs are in.
At an individual level, there are three stages of RSUs that may influence the process of getting a mortgage:
Vested RSUs
Granted, but unvested RSUs
Future RSU refreshers
Lenders can view each of these stages in a variety of ways that are often anything but uniform.
Vested RSUs, which are at this point just shares, will have a value so long as the company stays in business. Lenders typically don’t count vested RSUs toward your income, since at this point they’re shares, but they’re still helpful if you’re earmarking them to use toward the down payment or to set aside in reserve. If you tell a lender that you’re planned to sell vested RSUs to help with the downpayment, they’ll usually apply some percentage (e.g. 75%) to count towards your deposit.
Granted, but unvested RSUs can be treated significantly differently between lenders. Since unvested RSUs are not guaranteed, some lenders don’t want to include them at all and others may include some percentage based on the trading history of the company stock.
In the case of future RSU refreshers, some lenders will exclude them and others will apply a portion to your income as long as you can document a history of receiving RSU refreshers.
Since the process varies so greatly between lenders, we recommend finding out as much as you can during the pre-approval stage before going into underwriting. If your particular loan officer seems unsure whether your RSUs will or won’t be credited to you, it’s usually better to find someone else or wait to proceed until you have a definitive answer.
How are ESPP shares looked at by mortgage companies?
Mortgage companies typically care only about the ESPP shares that you’ve already purchased and will only give partial credit to the shares you’ve earmarked for the down payment.
Even if you’re participating in an amazing ESPP (like Nvidia’s ESPP) and plan to sell immediately after purchase, you usually will not receive full credit for the gain you’re expecting to lock in.
How should I view my RSUs when deciding how much house to buy?
It may be tempting to add up your salary plus RSUs when playing around with Zillow mortgage calculators, but this can lead to trouble.
Everyone’s individual financial situation is different, and the one thing everyone can agree on is that you don’t want to be left being unable to pay your mortgage.
We think it’s fine to include some value of your RSUs as you’re making the decision to buy a home, but if you choose to do that, there are two things we feel the need to caution you about:
The value of the company you work for can drop significantly.
Your RSU refreshers are not a guarantee.
If either of these worst case scenarios occur,, you don’t want to be left struggling to pay your mortgage.
Should you sell RSUs or ESPP shares to purchase a house?
Selling shares of your company stock can be a great way to fund your down payment on a house. If most of your investments are concentrated in your company stock, then it can prove to be a great opportunity for you to liquidate and diversify.
Two big downsides of using your RSUs and/or ESPP shares to purchase a house are:
(1) The company stock could go up after you sell.
(2) If your company stock is sold at a gain, you’ll need to pay taxes on whatever you sell.
Ultimately it’s a lot easier to live with your decision to sell if you have a sound rationale for selling your company stock. Many advisors even have their clients send themselves an email or write themselves a letter describing how they’re feeling in the moment and articulating the “why” behind the decision to sell.
It might seem kind of silly, but if you’ve ever practiced journaling, you know how easy it is to forget how you’re feeling in a given moment.
What’s the best way to save for a house when accumulating RSUs and ESPP shares?
Rather than simply letting all of your RSUs and ESPP shares accumulate, we typically recommend that you make a plan for how much to keep, how much to sell and reinvest, and/or how much to sell and save.
Letting all your shares accumulate can work out nicely if your company stock only goes up, but it can hurt your pool of funds for a down payment if the stock price drops rapidly. The advantage of selling stock over time to save for your down payment is that if the company stock goes down you’ll avoid some losses.
It’s difficult enough to determine when to sell RSUs and when to sell ESPP shares, but when you’re also trying to figure out the best way to accumulate/sell shares as you save for a down payment, that only adds to the stress.
Who is a good lender for someone with RSUs?
Lenders in the Bay Area or other tech centers tend to be most familiar with RSUs and other forms of equity compensation. If you’re struggling to find someone to work with, reach out to us at team@equityftw.com and we’ll happy provide some names based on your situation.
Final Thoughts on Buying a House with RSUs
Buying a house in today’s market is a significant investment and a significant expense that should not be taken lightly. Before you begin the nitty gritty process of buying a house and qualifying for a mortgage, you’ll want to give some serious thought to whether you really want to buy a house and how much you’re willing/able to spend.
Utilizing your RSUs and ESPP shares to help purchase a house can be a great decision, but it’s also one that should not be made lightly.
If you want help thinking through the home buying process or would like a connection to an experienced lender, we’re happy help.