How to properly account for down payment in house purchase

Special K

Hello,

I recently purchased a house for $350k with a down payment of $87.5k. I have a "House" account setup for tracking the home's value, and a loan (specifically mortgage) account setup for tracking the mortgage. Both of these accounts were setup using a manual configuration.

I have a single transaction in my checking account paid to the title company reflecting the cashier's check I gave them to cover my down payment and closing costs. My plan was to categorize all of the closing costs using the custom created category "Home:Home Purchase:Closing Costs", all of which would be paid to the title company, and somehow have the down payment be a transfer to either the home account or the mortgage account to reflect the fact that it's just a balance sheet change from a cash asset to a property asset.

If I transfer the down payment amount to the house account, the value of the house increases beyond its actual value by the amount of the down payment, which makes perfect sense but is inaccurate. If I increase the amount of the original mortgage by the amount of the down payment and then transfer the down payment amount into the mortgage account as the first transaction, the starting loan balance is correct but the monthly payment is wrong.

What is the correct way to model this? What category should I assign to the down payment portion of the transaction to the title company representing the cashier's check I gave them? It seems strange to leave it uncategorized even though the overall net worth ends up being correct that way.

I did find this other thread asking the same question however that poster's starting point seemed sufficiently different from mine that I had trouble following the solution:

https://community.quicken.com/discussion/7827083/tracking-downpayment-as-equity-in-new-home

Boatnmaniac

First, the down payment on a house purchase is part of the purchase cost, not part of the closing costs.  So, it should not be included in the closing costs transaction.   The closing costs should include the expenses incurred in buying a house other than the actual purchase price of the house.  They can include things like appraisal fees, loan origination fees, discount points, title searches, credit report charges and more.  The mortgage company might refer to the down payment + closing costs as "cash due at closing" but down payment is not a closing cost.

You might want to consider doing what I have done in the past:

HOUSE ACCOUNT: 

1. The opening balance should have the same date as the closing date and would be in the amount of $0.00 because while the house exists you have not yet closed on the house so for you it still has no value.
   
2. The $87.5K down payment transaction in your checking account should be a transfer to the house account.

MORTGAGE ACCOUNT:

1. The amount of the mortgage should be for the full amount of the mortgage ($262.5K balance due for the house purchase + the closing costs).  This will be your mortgage opening balance.
2. In the mortgage register, edit the opening balance transaction to change the category to a split category.
3. In the 1st line of the split category, enter a transfer of $262.5K to the house account.
4. In the 2nd line of the split category, enter your "Home:Home Purchase:Closing Costs" category and enter the closing costs amount.
5. Since you are not entering additional transactions are simply changing the category of the Opening Balance to a split category this will have no impact on the amortization and payments schedule.

When done, the house account will show a balance of $350K and the mortgage account will show a balance that should be matching what the lender says the amount of the mortgage is.

Your thoughts?

q_lurker

@Boatnmaniac has presented the 'right' answer in my opinion.  I'll simply add that it may be you want to to break down the closing costs in more detail.  You may want some costs to go to categories like escrow for insurance, escrow for taxes, initial interest on the loan (up to the first payment). 

It is also a 'your choice' as to how you manage the value of the property (the house asset).  Some want that to reflect cost basis, some market value, some property tax value.  I've heard of some users who operate with two accounts - one for the basic (cost) value, and a second for the 'gain' (or loss?) over and above that cost basis.  Your choosing market value which is fine.  Just be sure to give it enough thought as to what you need to be able to get from your data.