Securing a jumbo loan in California presents a unique challenge, especially for high earners with non-traditional compensation. In competitive markets like Los Angeles and the Bay Area, where home prices exceed conforming loan limits, a jumbo loan is often the only path to homeownership. However, if your income includes Restricted Stock Units (RSUs), performance bonuses, or K-1 distributions from a business, you may face scrutiny from underwriters who prefer simple W-2 income. This guide provides a clear framework for documenting complex income streams, satisfying lender requirements, and successfully qualifying for the financing you need. We will break down how lenders view each income type, the exact documentation you'll need, and alternative strategies to strengthen your application.
How Jumbo Lenders View Restricted Stock Units (RSUs)
For many professionals in California's tech sector, RSUs are a significant part of total compensation. However, mortgage lenders view this income with caution because its value is tied to stock market volatility. To consider RSU income for a jumbo loan, underwriters need to see a consistent history and a high probability of continuance.
What Lenders Look For
- History: Most lenders require a minimum of two years of RSU income history. They want to see that you have consistently received and vested these awards over time.
- Vesting Schedule: They will analyze your future vesting schedule. If a large portion of your unvested shares is set to vest within the next one to two years, it strengthens your case. If your grants are ending soon with no new awards, the income may be discounted.
- Company Stability: The lender will consider the stability of your employer. Income from a publicly traded, well-established company is viewed more favorably than stock from a private startup.
Documentation You Will Need
To properly document RSU income, you must provide a complete picture:
- Grant Agreements: All documents showing the total shares awarded and the vesting schedule.
- Vesting Statements: Brokerage statements showing the shares that have vested, their value at vesting, and the taxes withheld.
- Pay Stubs: Recent pay stubs that itemize RSU income separately from your base salary.
- W-2s: Two years of W-2s that show the RSU income reported to the IRS.
Example: An underwriter might take your total RSU income from the last 24 months, divide it by 24, and add that monthly figure to your base salary. If you earned $200,000 in vested RSUs over two years, they might add $8,333 to your monthly qualifying income. Some lenders may apply a 'haircut' and only count 70-80% of the calculated average to account for market risk.
Proving Your Bonus Income is Consistent
Like RSUs, bonus income is considered variable. Lenders need to be convinced it's a reliable part of your compensation, not a one-time windfall. Consistency is the most important factor.
What Lenders Look For
- Frequency and History: A two-year history of receiving the bonus is standard. A quarterly bonus received consistently for two years is viewed more favorably than a large annual bonus that has fluctuated significantly.
- Calculation Method: Underwriters want to understand how the bonus is earned. Is it tied to personal performance, company profits, or a combination? A clear, predictable structure is best.
- Declining Bonuses: A bonus that has decreased year-over-year is a major red flag and may be partially or fully excluded from your qualifying income.
Required Documentation
- Two-Year W-2s: This shows the total bonus amounts paid in previous years.
- Year-to-Date Pay Stub: Your most recent pay stub should show the bonus income received so far in the current year.
- Verification of Employment (VOE): Your lender will send a form to your employer to break down your income for the past two years, separating base salary, bonus, and any other compensation. This is a critical document.
Example: If you earned a $50,000 bonus in year one and a $60,000 bonus in year two, a lender would average this to $55,000 annually, or $4,583 per month. They would not use the higher, more recent figure.
Why Your Full K-1 Income Was Not Counted
For self-employed borrowers or partners in a business, K-1 income can be complicated. A common point of confusion is why lenders do not count the full income reported on the K-1. The reason is that lenders are concerned with cash flow, not just paper profit.
Distributions vs. Net Income
Your K-1 shows your share of the business's net income, but that is not necessarily the amount you received in cash. Businesses must retain capital for operations, growth, and taxes. Lenders will only count the income you actually received as distributions, or they will analyze the business's stability to determine if the income is sustainable.
What Lenders Analyze
- Business Tax Returns: Lenders typically require two years of business tax returns (e.g., Form 1120S for an S-Corp or 1065 for a partnership).
- Personal Tax Returns: Two years of your complete personal tax returns, including all schedules.
- K-1s: Two years of K-1s.
- Business Stability: They will look at the business's revenue and profit trends. A business with declining revenue is a high risk.
- Add-Backs: An experienced loan officer can 'add back' certain business expenses that are not actual cash outlays, such as depreciation or depletion, to increase your qualifying income.
California Jumbo Loan Reserve Requirements
Jumbo loans require significant post-closing liquidity, known as reserves. These are funds you have remaining after your down payment and closing costs are paid. Reserves are measured in months of your total monthly housing payment (PITI: Principal, Interest, Taxes, and Insurance).
- Standard Requirement: For a primary residence, most jumbo lenders require 6 to 12 months of PITI in reserves.
- Increased Requirements: If you have complex income, are self-employed, or are buying an investment property, the requirement can increase to 18 months or more.
Example: If your total monthly housing payment (PITI) is $10,000, and the lender requires 12 months of reserves, you must have $120,000 in acceptable liquid assets remaining in your accounts after the loan closes.
What Counts as an Eligible Asset?
- Checking and savings accounts
- Money market accounts
- Stocks, bonds, and mutual funds (typically valued at 70-100% of their worth)
- Vested funds in retirement accounts like a 401(k) or IRA (often valued at 60-70% of their worth)
Structuring Your Assets for a Jumbo Application
How you present your assets is just as important as how much you have. Underwriters look for stability and clear sourcing of funds.
Best Practices
- Consolidate Funds: Move the funds for your down payment, closing costs, and reserves into one or two accounts at least 60-90 days before applying. This avoids the need to source dozens of transfers from multiple accounts.
- Avoid Large Deposits: Any large, non-payroll deposit will be questioned. If you must make one, be prepared to document it immediately. Selling stock, receiving a gift, or transferring funds from a business account all require a clear paper trail.
- Document Gift Funds Properly: If receiving a gift for your down payment, the donor must sign a formal gift letter stating the funds are a gift with no expectation of repayment. You will also need to show the funds being transferred from the donor's account to yours.
Are There Jumbo Lenders for Self-Employed Borrowers?
Yes, certain lenders are better equipped to handle complex income scenarios. While large national banks often have rigid, automated underwriting systems, other options provide more flexibility.
- Portfolio Lenders: These are often community banks or credit unions that keep the loans they originate on their own books ('portfolio') instead of selling them. They have more flexibility in their underwriting guidelines and can use a more holistic, common-sense approach.
- Private Banks: The private banking divisions of larger institutions often cater to high-net-worth clients and are experienced in analyzing complex tax returns, business structures, and investment portfolios.
What is an Asset-Based Loan?
An asset-based loan, also known as an asset depletion or asset utilization loan, is an excellent alternative for borrowers with substantial liquid assets but lower documented income. Instead of verifying employment income, the lender qualifies you based on your assets.
How It Works
The lender will take your total eligible assets and calculate a qualifying 'income' from them. A common formula is to divide your total assets by a set term, such as 360 months (30 years).
Example: A borrower has $3 million in a brokerage account. The lender may divide this by 360 months to derive a qualifying monthly income of $8,333. This income can be used to qualify for the loan, even if the borrower's tax returns show very little income. This is an ideal solution for retirees or individuals who have recently sold a business.
Explaining Large, Irregular Deposits
Every deposit on your bank statements for the past 60 days must be sourced. This is a federal requirement to prevent fraud and money laundering. It is not the lender being difficult; it is a legal necessity.
How to Prepare
Before you submit your application, review your bank statements for any non-payroll deposits. For each one, gather the documentation.
- Selling an Asset: If you sold a car or other valuable item, provide a copy of the bill of sale and a copy of the check or wire transfer.
- Tax Refund: Provide a copy of your tax transcript or the refund statement from the IRS.
- Gift Funds: Have the gift letter and a copy of the donor's bank statement (with sensitive information redacted) showing the funds leaving their account.
- Bonus or Commission: Provide the corresponding pay stub that shows the deposit amount and description.
Being proactive with this documentation will prevent significant delays and stress during the underwriting process.
FAQs:
- What Debt-to-Income (DTI) ratio do jumbo lenders prefer for complex income borrowers?
Jumbo lenders are more conservative with DTI ratios than conventional loans. For borrowers with complex or variable income, most lenders want to see a DTI ratio at or below 43%. This means your total monthly debt payments (including your new proposed housing payment) should not exceed 43% of your gross monthly income. Having significant reserves can sometimes allow for a slightly higher DTI, but it is at the lender's discretion.
- Can I use my future RSU vesting to qualify for a jumbo loan?
Generally, no. Lenders will only consider RSUs that have already vested and been paid out to you. While a strong future vesting schedule helps an underwriter determine the likelihood of continuance for your existing RSU income stream, the unvested shares themselves have no value for qualification purposes because they are not guaranteed.
- How does a recent job change affect my jumbo loan application in California?
A recent job change can be a significant hurdle, especially with variable income. If you've changed jobs within the last two years, lenders may not be able to establish the required history for bonus or RSU income. However, if you stay within the same industry and your new compensation structure is similar or stronger, an underwriter may make an exception. A strong offer letter detailing your base salary and guaranteed bonus structure is critical in these situations.
- Do I have to sell my stocks to have them count as reserves?
No, you do not typically have to liquidate your investment accounts for them to count as reserves. Lenders will accept a recent brokerage statement as proof of funds. However, they will usually discount the value to account for market volatility. For example, a lender may only count 70% of the value of a stock portfolio. So, a $200,000 portfolio might be counted as $140,000 in reserves.
A thorough review of your financial profile by an advisor specializing in complex income is the key to a successful jumbo loan application. Let us help you structure your file for success before it reaches an underwriter. Take the next step and apply now to get a clear path forward.
