RSUs, Rate Locks, and the 200-Day Stock Trap

Daniel Brooks

Picture this file landing on your desk on a Monday morning. A senior software engineer named Marcus Vance is applying for a five hundred twenty thousand dollar conventional loan on a six hundred fifty thousand dollar primary residence. He is putting twenty percent down. To make the debt to income ratio work at twenty eight percent, he needs his full one hundred twenty thousand dollar base salary plus sixty thousand dollars in annual Restricted Stock Unit vesting. And here is the kicker, his five point eight seven five percent interest rate lock expires in exactly five business days.

Daniel Brooks

On paper, everything looks clean. His W 2 show total earnings that support the numbers. But as mortgage professionals, our job is to separate gross earnings on paper from stable, compliant income under agency rules. So you pull the Form 1005 written verification of employment, and you cross reference it with his stock grant agreements and vesting schedules. And right there, buried in the schedule, you spot the flaw.

Daniel Brooks

Twenty five thousand dollars of his twenty four month vested income did not come from regular annual performance vesting. It came from a one time initial employment inducement. Under Fannie Mae Selling Guide B3 3.3 07, sign-on bonuses received in the form of restricted stock are explicitly prohibited from qualifying income calculations. You cannot slice that one time inducement over a multi year average and call it recurring income, no matter how much it boosted his W 2 box one in prior years.

Daniel Brooks

And if that exclusion was not enough to derail the file, there is a second trap waiting in the market math. Let us say Marcus experienced a thirty percent tech stock price drop over the past six months. A lot of originators look at the current spot market price on the day of application, or they simply average the historical W 2 totals. Both approaches are incorrect under the guidelines.

Daniel Brooks

To properly calculate qualifying RSU income, you must determine the two hundred day moving average share price. You take that two hundred day moving average price, multiply it by the total number of distributed vested shares over the past twenty four months, and then divide that total by twenty four. If the stock has taken a hit, that two hundred day moving average pulls your usable monthly income down significantly compared to what the borrower earned when the shares actually vested. Between stripping out the sign on grant and applying the two hundred day moving average, Marcus's qualifying DTI suddenly spikes well past acceptable limits.

Daniel Brooks

So what happens when the clock is ticking on that five day rate lock, and the borrower realizes his dream loan is about to collapse? That brings us straight into the compliance and ethics boundary.

Daniel Brooks

When Marcus sees the updated numbers, the pressure mounts immediately. He contacts the loan originator and makes a direct request. He says, look, my employer calls all equity compensation a performance reward in my annual summary. Just list that twenty five thousand dollars as a standard recurring performance bonus on Form 1008. That saves the five point eight seven five percent rate lock, gets the automated underwriting approval, and everyone wins.

Daniel Brooks

This is the moment where disciplined underwriting separates itself from compliance risk. Reclassifying sign-on RSUs as recurring performance bonuses on the transmittal summary is not a creative workaround. It is misrepresentation. Automated underwriting systems and secondary market quality control audits regularly cross check VOE line items against grant agreements. When an audit reveals that equity categorized as recurring bonus was actually a non recurring sign on grant, the loan becomes non deliverable, and the lender faces a buyback demand.

Daniel Brooks

In my years analyzing underwriting decisions, I see originators make this mistake constantly. They confuse gross taxable income reported to the IRS with stable qualifying income required by Fannie Mae. They assume that if it is on the W 2, it counts. But tax law and mortgage underwriting serve two entirely different purposes. Tax law records what was received; underwriting measures what is reasonably expected to continue for at least thirty six months.

Daniel Brooks

So what are the compliant next steps when you encounter conflicting disclosures on a VOE? First, you do not coach the borrower to request modified wording from human resources. Coaching a borrower or employer to alter descriptions on official documents violates federal compliance standards. Instead, you issue a formal, written clarification request directly to the employer's HR or stock administration department. You ask them to break down historical vesting by grant type, separating initial employment awards from annual performance grants, and to confirm the remaining vesting schedule for the next thirty six months.

Daniel Brooks

If the employer confirmation verifies that the remaining vesting schedule falls short of thirty six month continuity, or that the historical average relies on disqualified sign-on grants, you must adjust the qualifying income on Form 1008 accordingly. If the file no longer qualifies, you escalate to credit committee or underwriting for an immediate adverse action or counteroffer review, such as restructuring the loan with a higher down payment or bringing on a non occupant co-borrower.

Daniel Brooks

To keep your team safe, I recommend embedding what I call the Equity Origin Principle into your originations workflow: Never aggregate RSU distributions without verifying individual grant award types. Treat every stock schedule with the same scrutiny you would apply to self employed tax returns.

Daniel Brooks

Here is your four step verification checklist for every RSU file. Step one: Review all original grant agreements to isolate and exclude sign-on bonuses received in the form of restricted stock. Step two: Reconcile historical vesting reports against W 2 Box one figures for the past two full years. Step three: Calculate the stock price using the mandatory two hundred day moving average rather than spot prices or past vesting values. Step four: Verify thirty six month continuity by confirming that unvested shares under existing performance grants will vest over the next three years at or above the qualified level.

Daniel Brooks

When you stick to those four steps, you protect your lender from buyback risk and ensure your borrower receives an enforceable, compliant loan. That is all for this case study, talk to you next time.