Securing a mortgage can be stressful for everyone, but it’s especially so for people working at tech startups.
That’s because many tech workers are compensated with nontraditional income like equity that vests over 3 or 4 years. For those in sales, income can be based on commission. These types of incentive compensation details don’t show up on a traditional W-2, which banks examine when approving mortgages.
A bank may view equity as unstable income, even if that isn’t the case, said Laura Veith, head of people at Eave, a direct mortgage lending company. That’s also true for commission payouts, which come infrequently, at least from a bank’s point of view.
Founders may be asked to prove two or three years worth of income, even if their companies are doing well. Sometimes, they are advised to wait those years to apply for a mortgage at all, even if they have significant assets.
For many tech employees, it can lead to loan rejections and lost opportunities.
“People are like, ‘What the heck? I make money, and I can’t get a mortgage even though I’m worth something?’” Veith said. “Eventually the mortgage may go through, but they’ve already lost out on several of the houses they’ve bid on.”
However, there is a way to avoid the rejections. Veith shared what tech employees can do to reduce stress and buy their dream homes.
1. Get your financial documents in order
The key to a smooth mortgage process starts with getting your financial documents in order. Veith recommends that tech workers have their W-2 forms, pay stubs, stock grants, vesting schedule and corporate HR information to provide to the lender for verification of incentive compensation.
This includes any financial holdings, rental property income statements, alimony payments and anything else. If there’s been a large bump in salary from the previous year, prepare to explain that to a bank.
For many tech workers who receive income other than regular salary, those documents can add up and obtaining them on the bank’s demand can be challenging. Without them, that income on a W-2 can seem too low, even if a person’s total income is enough.
“Having all this information upfront will allow a mortgage lender to take a really good look at what you can afford,” Veith said.
2. If you cash in, cash in wisely
This is critical for tech workers who have money tied up in equity or other financial holdings. There may be a temptation to take the money out to bypass the mortgage and pay for the house in cash. However, withdrawing that money could have huge tax penalties.
“Whenever there’s a sale of equity, you’ll face tax consequences you might not become aware of until you file,” Veith said. “It can materially impact your income and whether you can afford the mortgage you are planning for.”
To avoid that, Veith recommends prospective home buyers talk with a tax adviser.
“It’ll help you make an educated decision around your mortgage and what makes sense for you,” she added.
3. Take the future into account
On the flipside of tax penalties, it’s important for prospective home buyers to understand what their future income will look like. For tech employees, this means understanding the future earnings from equity sales, bonuses, commission checks and more.
To verify these future earning, tech employees can work with their company’s human relations team to write up an employment verification report that confirms any guaranteed bonuses, vesting schedules and other future earnings.
If tech workers or their mortgage lenders don’t take those future earnings into account, they might underestimate what they can afford, Veith said.
Eave is a direct mortgage lending company that utilizes a proprietary technology that can automate 80 percent of the mortgage-lending process, while an employee provides personalized support to complete the process. It also hosts free financial wellness workshops.
