When I started my first foray into QuickBooks I was in my early 20' and just understood QuickBooks basics. Now, please don't get me wrong, I have a good handle on my finances for someone in there 20's but I'm in no position financially or personally to be buying a house. Terms associated buying a house such as escrow, county tax payments, and PMI were slightly foreign at first and took some questions to get a good handle on it. Nearing my 30's now and using QuickBooks daily it's a question that I get often, how do I book my home in QuickBooks?
Basics of booking a house purchase in QuickBooks
When you look at a real estate purchase as a whole it seems complicated but when you break it down by it's parts it become pretty easy to understand. The assumptions for this article are that you've bought a piece of property, it's being financed by a bank for a set amount of time, you'll be making monthly payments to pay both principal and interest along with paying into your escrow account
Initially the home (Fixed Asset) is purchased by a loan (Long Term Liability) from the bank and a down payment (Cash or Bank) by you. If the home is agreed to be purchased for $100,000 and you pay $20,000 toward the down payment and the bank lends you $80,000 you would end up booking one General Journal Entry for $80,000 to Credit the Long Term Liability (Mortgage) and Debit the Fixed Asset (the Home). The $20,000 down payment would then be a check written to the seller to hit the Fixed Asset (the Home). You now have $100,000 in the Fixed Asset Home account, $80,000 in the Long Term Liability Mortgage account, and your checking account is $20,000 less.
Handling a monthly mortgage payment in QuickBooks
As you pay the mortgage each month your bank will send you a breakdown of principal and interest payments along with payments to an escrow account. When the check is written in QuickBooks each month (this is when I would use a QuickBooks memorized transaction to save time by the way) you split the transaction into three separate lines. One line is the principal payment applied towards the Long Term Liability to slowly pay down the loan and the second is the interest payment booked under an Interest Expense account. The third is your escrow payment.
Handling escrow payments in QuickBooks
Ok so, what is an escrow payment then? An escrow payment with regards to a mortgage is simply money given to another party to hold until certain payments, such as home insurance premiums and tax payments, are due. If a home for instance has $1,200 due in home insurance and $1,200 due in property taxes per year the bank will then tell you to pay $200 a month to hold in escrow until the total $2,400 is due at the end of the year. By telling you to pay $200 a month the bank has now effectively forced you to save $2,400 to these yearly expenses.
To book this correctly in QuickBooks you have to understand that the $200 being paid out per month is technically still yours. Just like you would put money into a savings account (Current Asset) the escrow account (Other Current Asset) is also an asset. For instance, every month you pay $200 into the escrow account (Other Current Asset) and at the end of the year you know have $2400 sitting in this account. On the statement from your bank you see an insurance payment (Insurance Expense) for $1,200 and a property tax payment (Tax Expense) for $1,200. You then book these expenses against the escrow account (Other Current Asset) to $0 the account out! Voila, balanced books...
Booking mortgages and the subsequent payments diligently when the correct documentation is available is a huge step to help save both you and your CPA's time at the end of the year. Think about it... if you have a mortgage that is ignored for an entire year you now have to track down the original closing papers, the twelve subsequent statements that show the payments made, and keep track of all payments made in and out of the escrow account. A lot of other scenarios associate themselves with mortgages such as refinances of one or multiple loans on a single property, complete loan pay offs, missed payments, associated late charges etc. It can get complicated and over whelming at times but just break it down by its parts and everything will just seem a lot clearer.