When I started my first foray into QuickBooks, I was in my early 20s and just understood QuickBooks basics.
Now, please don't get me wrong. I had a good handle on my finances for someone in their 20s, but I was in no position financially or personally to buy a house.
Terms associated with buying a house, such as escrow, county tax payments, and PMI, were slightly foreign at first, and it took some questions to get a good handle on them.
I'm a little older now and use QuickBooks Online daily. I often get the question: How do I book a home purchase in QuickBooks?
Booking a House Purchase Basics
When you look at a real estate purchase as a whole, it doesn't seem very easy, but when you break it down into parts, it becomes pretty easy to understand.
The assumptions for this article are:
- You've bought a piece of property
- A bank is financing it for a set amount of time
- You'll be making monthly payments to pay both principal and interest, along with paying into an escrow account
Initially, the home (Fixed Asset) is purchased with a loan (Long-Term Liability) from the bank and a down payment (Cash or Bank) from you.
Let's say you agree to purchase a home for $100,000, pay $20,000 toward the down payment, and the bank lends you $80,000. You would book 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 or bank draft to the seller to be applied to 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 $20,000 less in your checking account.
Entering a Monthly Mortgage Payment
As you pay the mortgage each month, your bank will send you a breakdown of principal and interest payments and payments to an escrow account.
When the payment is made in QuickBooks each month, the transaction needs to be split into three lines.
The principal payment is applied to the Long-Term Liability Mortgage to pay down the loan, the interest payment is booked under an Interest Expense account, and the Escrow payment is applied to an Other Current Asset account.
Handling Escrow Payments
Okay, so what is an escrow payment? An escrow payment for 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 hold $200 a month from the monthly mortgage payment in escrow until the total is $2,400, which is due at the end of the year.
You pay $200 into the escrow account (Other Current Asset) every month, and at the end of the year, you know you have $2400 sitting in this account. The bank ensures these expenses are covered since you are responsible for them, and they have lent you the money.
Your mortgage statement will show an insurance payment (Insurance Expense) of $1,200, a property tax payment (Tax Expense) of $1,200, and a reduction of the Escrow balance.
The expenses are recorded to the escrow account, which will $0 the account out! Voila, balanced books...
In Summary
Booking mortgages and the subsequent payments diligently when the correct documentation is available is a huge step that can help save both you and your CPA time at the end of the year.
Think about it: If you have a mortgage that has been 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 all payments made in and out of the escrow account.
Many other scenarios associate themselves with mortgages, such as refinances of one or multiple loans on a single property, complete loan payoffs, missed payments, associated late charges, etc.
It can get complicated and overwhelming at times, but if you break it down into its parts, everything will seem a lot clearer.
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