unofficial microsoft.public.money FAQ and A
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How to do things in Money: Mortgages and stuff

Q) We just wrote an earnest money check to buy a house. How do we deal with all of this in Money?

A) Buying and owning a house creates the most complex set of Money transactions and accounts of any activity most of us engage in. But it's really fairly simple and easily managed by breaking down the activities. Many of these activities are treated in other places in the FAQ. This answer will refer to those and provide an overview to the whole process.

Buying a house involves transactions before purchase, transactions when the purchase closes, new liability for paying the mortgage--unless you paid cash for the entire purchase, a new asset added to your net worth, new bills to pay every month, and quite likely a new account holding some of your money in escrow for your mortgagor to pay some recurring expenses like insurance and property taxes.

The first thing to deal with is the earnest money deposit and any pre-purchase expenses. The pre-purchase expenses (a property inspection or a credit report or similar) are just expenses you can account for like any other expense. Some category like Miscellaneous:Fees and Service Charges might be appropriate. The earnest money deposit is another matter. You can think of this as contributing to your equity in the house, and eventually you should do this, but that's something you may want to defer since things may happen between now and closing and maybe now is not the best time to set all of that up. So, the best bet now is to expense it against some category like Miscellaneous:Deposit, Credit to Follow. (You may need to create a category like this.) When you enter the transactions for the closing, you can put in a split element to reverse the amount of this transaction against this category (use a negative number against the original category, Miscellaneous:Deposit, Credit to Follow if you are following the example,) then add this amount to the amount you transfer to the Asset account.

When you close the purchase, you will receive a settlement sheet itemizes all of the debits and credits on your half of the transaction. Debits include things like your payment to purchase the house and various buyer-paid fees. Your credits include things like the proceeds of the loan you accepted and the earnest money deposit. With several exceptions, this activity is similar to and can be handled the same way as a mortgage refinance. See "I just refinanced my mortgage; how do I enter all of this into Money?" for more information. Since buying a house typically doesn't involve an existing loan payoff on your behalf, you should be able to enter the closing transaction in Money with one Money transaction. The splits of this transaction should total the amount of money you take to the closing.

As the refinance FAQ notes, follow the settlement sheet, and remember the split is your friend. The exceptions to the refinance FAQ are handling the earnest money deposit, adding the asset to your net worth, and handling setup of escrow accounts. Treating the earnest money deposit was covered above. Treatment of the asset and escrow accounts is covered below.

Mortgage loan accounts are easily created in Money. Setup a new loan account (you can specify Loan or Mortgage as the kind of account) and follow the prompts of the create loan wizard. Several notes are in order. First, there is no good way to "transfer" the proceeds of the loan from the loan account to the closing transaction. As noted above, techniques and a workaround can be found in the refinance answer. Second, the loan wizard may not like the exact principal, interest rate, payment, and term you enter. You can leave the interest rate blank and it will compute the appropriate interest rate for you. Note that the "additional fees" the Loan Account setup wizard mentions may well be transfers to an escrow account that are treated below.

Buying the house adds to your net worth, even if most of this addition is offset by the liability for the mortgage. A Money Asset Account provides a way to account for this. It also provides a handy way to keep track of the cost basis of the investment. Cost basis is something you may eventually need to know for tax purposes. An Asset Account is not required, but for these reasons, creating one is recommended.

When you create a mortgage loan, Money prompts you to create an Asset Account or associate this loan with an existing asset account. You can set an Asset Account up now or set it up separately later. If you set it up separately later, Money will ask if you want to associate any loan accounts with this asset account. You should specify the Money Loan Account you created for the mortgage. The dialog for setting up an Asset Account asks for initial value of the asset. We recommend $0. We'll establish its value in the next several steps.

One of the "buying a house" exceptions cited above to the refinance FAQ is the problem of accounting for the net worth impact of the new asset. Here it is: you transfer the entire purchase price from the closing transaction to the Asset Account with a split element, category Transfer:[name of asset acct], in the closing transaction. This will be essential to making that transaction balance.

Once this is done, you can account for additions to your cost basis (like adding a swimming pool, but not like painting the place) by transferring the increase in cost basis to the asset account rather than expensing it outright. So, while you might call painting the house Housing:Maintenance, you can call building the pool Transfer:[name of asset account]. You invested and made the house worth more: this is how you can track it.

Many mortgage lenders require you to pre-pay expenses like insurance and property taxes with your monthly payments and then they pay the bills on your behalf. This arrangement is called an escrow account. "How should I handle my mortgage escrow account?" discusses escrow accounts. Your escrow account may need some transfer from the closing transactions for money retained at closing to build up the initial balance of the escrow account if this is a buyer expense. On the other hand, you may want to create the escrow account with a starting balance if there is seller money transferred to your escrow account to cover their portion of, say, taxes paid in arrears. Your settlement sheet should explain all of this; if it's not clear, by all means ask the mortgage company representative who presides over the closing to explain it to you.

One final thought: if you anticipate owning multiple houses or just want to better understand why expenses occur, it may make sense to consider using what Money calls Classification. Classification provides up to two additional two-level attributes that can be assigned to transactions similar to Category. For instance, you could define the first classification as Class with Classes and Subclasses like Property:123 Elm St. Then you can use Class in addition to Category to aggregate transactions for reporting and the like. As an example, Taxes:Property Tax and Insurance:Homeowner’s expenses could both also be associated with Property:123 Elm St. Read more about classification in on-line help to learn more.

Please see this disclaimer if you are using Money 2005 or this comment if you are using Money 2006.

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