Stock options are a type of equity compensation that gives employees the right to purchase a certain number of shares of the company’s stock at a specified price (known as the “exercise price”) within a certain period of time. The purpose of stock options is to align the interests of employees with those of the company’s shareholders, by giving employees a stake in the company’s success.

Vesting is the process by which an employee earns the right to exercise their stock options. Vesting typically occurs over a period of time (such as four years) or upon the achievement of certain performance milestones (such as reaching a certain sales target). When a stock option vests, it means that the employee has earned the right to exercise the option and purchase the shares of stock at the exercise price.

For example, if an employee is granted 100 stock options that vest over four years, they may receive 25 options per year over the four-year period. Once the options have vested, the employee can purchase the shares at the exercise price any time before the expiration of the option.

Restricted stock units (RSUs) are a form of equity compensation issued by companies to employees as a form of non-cash compensation. RSUs are like stock options, but unlike stock options, employees do not have to pay anything to acquire the shares and the shares are not immediately vested. Instead, the shares are restricted and vest over time, or upon the achievement of certain performance milestones.

It is common for publicly traded companies in the UK and other countries to offer RSUs as a form of compensation to their employees.

Some mortgage lenders will use vesting stock in their affordability calculations. Lenders will look at the history of compensation awarded and a borrower’s vesting schedule, both historically and projected. Some mortgage lenders are willing to use 100% of vesting stock for affordability purposes.

It is possible to use RSU income for mortgage purposes. Mortgage lenders like to see a history of RSU income over a couple of years to get comfortable with using it in their affordability calculations.

Mortgage lenders will use up to 100% of bonus income when calculating how much they can lend. The amount of a bonus a mortgage lender will use depends on the frequency (monthly/quarterly/annually) of the bonuses, and for how long they have been paid.

Some mortgage lenders will accept bonuses or commission paid in a foreign currency (non-sterling). The compensation will be converted into sterling and treated in the usual way for affordability purposes.

There are several factors that will affect a mortgage lender’s decision on how much bonus or vested stock they can use. A lender will look at the history of an applicants bonuses and may decide to average the income over several years. They may also decide to use a % of bonus – this can range from 50% to 100% of bonus/vested stock.