When it comes to mortgage financing, Fannie Mae and Freddie Mac are two prominent names that often come up. While both entities play a crucial role in the housing market, they differ in various aspects, including their policies on the use of stock options as an additional income source.
Freddie Mac’s Approach
Freddie Mac recognizes the value of stock options and allows the use of Restricted Stock (RS) or Restricted Stock Units (RSU) as another form of income. These stock options are often offered by employers in lieu of traditional bonuses or commissions. However, to consider this income source, Freddie Mac requires a two-year history of receipt.
Income Calculation
To calculate the income from RS or RSU given as performance-based vesting, Freddie Mac follows a specific formula. First, they multiply the 52-week average of the stock as of the application date by the total number of shares received over the past two years (pre-tax). Then, this amount is divided by 24 months to determine the monthly income.
Fannie Mae’s Approach
In contrast to Freddie Mac, Fannie Mae’s guidelines do not address the use of stock options as an income source. Fannie Mae does not consider RS or RSU as an option when calculating income for mortgage financing purposes. Therefore, individuals relying solely on stock options may face limitations when seeking mortgage approval through Fannie Mae.
Understanding the differences between Fannie Mae and Freddie Mac is crucial for individuals navigating the mortgage financing process. While Freddie Mac allows the use of RS and RSU as an additional income source, Fannie Mae does not consider stock options in their income calculations. It is important for borrowers to be aware of these distinctions and choose the financing option that aligns with their specific circumstances.
As a mortgage broker that deals directly with lenders that utilize Fannie Mae and Freddie Mac, we can structure loans that would fit a favorable option for our borrowers. Contact us for more information about how we calculate income.