In my last blog, I set the stage on practical applications for the new RU/RSU income.  I also went over some of the guidelines which outline when and how the income can be used.  For this installment, let’s get down to the “how” to properly calculate income.  In case you missed part 1 here is the link  “Part 1 RSU/RU the “new” income on the block..”

 

Restricted Stock Income How-To Guidance

The RS/RSU income is found in Employed Income under Additional Employed Income section 5303.1. Here are the steps I recommend you follow to approve restricted stock income.

1) Obtain the supporting documentation (there are unique items you must review)

2) Determine if the stocks are performance-based vesting or time based vesting from those documents

3) Confirm the borrower has a two-year history of earning RS/RSU income and it “should” continue three years minimum

4) Calculate the income

 

Supporting Documents

For all my underwriting friends, this income has new unique requirements, don’t breeze over this section!

1) Evidence the stock is publicly traded
2) Documentation verifying that the vesting provisions are performance-based (e.g., RS and/or RSU agreement, offer letter)
3) Vesting schedule(s) currently in effect detailing past and future vesting
4) 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)

Calculating Performance-Based RS/RSU’s

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.

(e.g., 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)

Calculating performance RS or RSU distributed as a 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.

 

Calculating Time Based RS or RSU’s

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.

(e.g., 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)

Calculating time-based RS or RSU’s distributed as a 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.

 

In Closing

I know what your thinking, man this is a LOT of work.  BUT keep in mind the goal is to serve our clients, this is acceptable income and can be used to “pay the bills” including the mortgage.  If we can help a few more good clients get into that new home….it is all worth it in the end!  Stay on top of your game by joining our online continuing education program, more details are here at www.uwfieldguide.com.