New Mortgage: Accounting for new asset, loan, and down payment

lindycorp

More of an accounting / how best to use quicken than a technical question here ... In a home purchase, there is a sale price, valuation (appraisal), a mortgage and a down payment. I set up the asset account, entering the appraisal value when Q asks how much the house is worth. At the conclusion, it asks about linking to a mortgage/loan account, and I went through those prompts as well with the terms and amount of the mortgage. So far so good. But now I want to account for the closing transaction. Using simple numbers, if the house appraised and was purchased for 250k, and I put down 50k at closing and took a mortgage/loan for 200k, my asset is in Q and shows for 250 and my loan for 200. If I wrote a check for 50k from my checking for the down payment, I go into my checking account and enter the check -- and allocate that 50k to what account? I've never quite followed this in Quicken - any help greatly appreciated.

Frankx

Hi @lindycorp,

So the actual transaction to purchase the house that should have been entered, in accounting terminology, would be displayed as:

Debit to account named "House" for ........................$250,000.00
Credit to account named "Mortgage for .............................................$200,000.00
Credit to Checking account for downpayment check .........................$  50,000.00

But in Quicken you recorded the House account as part of "Quicken setup" of your file, including the house account, as opposed as part of the actual "purchase transaction".  That's simply the way Quicken works for folks just starting out with Quicken and for whom it wouldn't necessarily be required to enter transactions prior to starting with Quicken.

But to now answer the question you asked, if you need to record the check that you wrote as part of closing for 50k, you should record that to the "House" asset account.  That will then reduce the value of your house to 200k, so you should then open up the house account in Quicken and revise the first transaction increasing it by 50K, which should then show the House with the original 250k valuation.

Footnote - I simplified the purchase transaction above and did not include some of the "expenses" and other payments that would normally be incurred in the purchase of a home and should actually be recorded as part of the cost of the home, or as tax decuctible payments/expenses.

Let me know if you have any followup questions.

Frankx

Frankx

BTW, if you setup the mortgage loan as an online/downloading mortgage account in Quicken when you did the setup, that is not recommended, because you will not have control over the account and other users have reported problems with such accounts (many of which have been reported in this Quicken Community).  The main problem is that such accounts do not have a transaction register, so you are stuck with whatever is downloaded and oftentimes that data may not be correct.

Therefore I would suggest that you deactivate that online loan which will result in your having a transaction register for the mortgage.

Frankx

lindycorp

Quicken walks you through the process with the result being that the "house" account is an asset, where the "balance" is the valuation/appraisal, and the mortgage is a liability with the balance being how much you take the mortgage out for. Your "net" then is the difference, all of which seems to make sense, until you get to the accounting of the down payment.

>> Debit to account named "House" for ........................$250,000.00
Credit to account named "Mortgage for .............................................$200,000.00
Credit to Checking account for downpayment check .........................$ 50,000.00 <<

In this example, I can't tell what kind of account "House" is. It would appear that if you started with a 0 balance and then create a 250k debit -- you have a -250k balance ???

If "mortgage" gets a 200k credit, how is that a loan/liability account? Lastly, since the 50k down payment was paid *from* checking, how can it show as a credit there?

If I "buy" the quicken model of asset / liability, the only thing that seems to make sense is to take the 50k down payment, artificially remove 50k from the house asset account, then write the 50k check from checking crediting it to the House account. That leaves the valuation of the house account the same, which makes net worth a wash which is accurate, but seems to better represent the true flow of funds. Just seems a little "wiggy" for an accounting system. It also seems to leave the purchase price unrecorded.

If each payment then goes with principle debited to the mortgage account decreasing the balance and the interest into an interest category, then the mortgage is accurately decreasing (actually, the negative value is moving closer to 0), which reflects in a slow steady increase in net worth which accurately tracks the reality. The asset account can fluctuate according to Zillow, which also would relatively speaking be accurate. Seems odd that actually the house account just sits there with no transactions posting to it, but not sure what else makes sense.

I didn't set up auto transactions, and do see the register (easier to see with two line display) in the house asset account. Where it makes sense that auto download would come into play is in the mortgage account, and yet when I go there and select edit account details, there is no "online services option" the way there is for credit cards for instance. Very strange. Must say, Q does not make this intuitive at all.

Frankx

Hi again lindycorp,

There are a lot of questions in your response above, so I'll try to go through each one.  But first, some basic accounting/bookkeeping information:

• an "asset" is something of value that is "owned" - it has a "debit balance"
• a "liability" is something "owed" - it has a credit balance
• "equity" (or owners equity, shareholders equity, net worth, etc.) is the financial "value" of the business/enterprise/individual computed by subtracting total liabilities from total assets or (Assets - Liabilities = New Worth) .

Q1 - In this example, I can't tell what kind of account "House" is. It would appear that if you started with a 0 balance and then create a 250k debit -- you have a -250k balance ???

A1 - "House" is, of course, an asset account.  After the entry you will not have a "-250k balance" - rather you'll have a positive 250k balance.

Q2 - If "mortgage" gets a 200k credit, how is that a loan/liability account? Lastly, since the 50k down payment was paid *from* checking, how can it show as a credit there?

A2 - This one is a lot harder to explain to people who aren't accountants or involved in finance.  The colloquial use of the term (e.g. - "I give her credit for being so wealthy") implies a "positive" attribute and seems to be the opposite of the accounting meaning.  In accounting a credit entry increases a liability and decreases and asset - both of which have a negative effect on a person's/company's net worth. So the act of taking out a mortgage loan, is a new liability account to the entity receiving the funds.  And regarding the "50k down payment" - paid from the checking account - that is like any other withdrawal - it is a "credit" that reduces the "debit balance" that must always exist in a bank account (or you'd be overdrawn at the bank).

You also said "Seems odd that actually the house account just sits there with no transactions posting to it, but not sure what else makes sense." For most folks, their real estate assets often don't have a lot of regular transactions being recorded in the accounts.  However, from time to time, you may make changes to the house that should be recorded - such as adding a new addition, or turning a basement/garage into living space, and those "improvements" should be recorded as "debits" or increases to the account in Quicken.

And lastly, you said "Where it makes sense that auto download would come into play is in the mortgage account, and yet when I go there and select edit account details, there is no "online services option" the way there is for credit cards for instance."
Actually, there are some mortgages for which transactions can be imported into Quicken - see guidance located at this LINK.  However, many users have had issues/problems result from "connecting" their mortgage liability accounts with Quicken, so I wouldn't recommend it.  Besides, most mortgage transactions are very routine and can be easily entered manually with memorized payees.

Hope that this helps.

Frankx