A simple formula for a financial expert before buying a home

 The Crucial Step You Must Take Before Purchasing a Home: Transform Your Financial Situation

when you become debt-free and your income is entirely yours... it places you in an entirely different financial position

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In this article, we'll delve into the key principles that underpin homeowners' success when it comes to home buying. Without a doubt one of the most important and challenging investments you will ever make. Given the unpredictable housing market and high mortgage rates, navigating the process becomes more complicated.

When it comes to buying a home, it's undoubtedly one of the most significant and challenging investments you'll ever make. Considering the unpredictable housing market and soaring mortgage rates, navigating the process becomes even more complex.

To tackle this daunting task, Rachel Cruz, an expert in personal finance and co-host of the popular business podcast "Smart Money Happy Hour," swears by her father's tried-and-tested home buying strategy. Before purchasing her first home, Cruz followed two essential steps: eliminating all debt and establishing an emergency fund equivalent to three to six months' worth of expenses.

"My husband and I adhered to this formula," Cruz shared during an interview with CNBC. "I understand that it can be incredibly difficult for many people, especially with the burden of student loans and other debts that the average American carries. However, when you become debt-free and your income is entirely yours... it places you in an entirely different financial position."

For countless individuals, freeing themselves from debt is easier said than done. Similarly, building an emergency fund from scratch can be a time-consuming process. Nevertheless, Cruz insists that both these prerequisites are vital before embarking on homeownership. In the following sections, we delve into the reasons behind this advice and explore expert tips on how to achieve this two-step formula.

Step 1: Liberating Yourself from Debt

A substantial number of Americans bear some form of debt, with credit card debt being the most prevalent, as reported by a January 2023 Bankrate survey. Federal student loans are also a significant burden, with 43.5 million Americans having taken them out by last year, according to the US Department of Education. Additionally, a 2021 report from the National Association of Realtors (NAR) revealed that 51% of student loan holders claimed their debt had hindered their ability to purchase a home.

Paying off debt before diving into homeownership is a pragmatic concern. Depending on the extent of your debt, it could result in mortgage denial or high-interest rates, even if your credit score is good.

While liberating oneself from debt may seem daunting, it is not an insurmountable challenge. Jasmine Taylor, 31, employed a "cash-stuffing" strategy, enabling her to pay off $23,000 in student loans and an additional $9,000 in medical and credit card debt within a year. Cash-stuffing involves solely spending the cash you have, employing the zero-budget method. As Taylor explained in an interview with CNBC Make It, "You start your budget with your paycheck amount and assign every dollar a specific purpose until you reach zero."

Other effective strategies for debt reduction include credit card balance transfers and the snowball method, which entails paying off smaller balances first to build momentum. CNBC Make It's Loan Calculator provides a useful visualization of your debt payoff timeline.

Step 2: Establishing an Emergency Fund

Saving for a down payment can be arduous, with 29% of first-time homebuyers acknowledging it as the most challenging aspect of the home buying process, according to a 2022 report from the National Association of Realtors.

However, accumulating enough cash for a down payment is just the beginning. Inspection fees, mortgage payments, moving costs, repairs, and other household obligations all demand additional funds.

This is where an emergency fund comes into play.

"When you own a home, you quickly realize how expensive it can be," Cruz advises. "From appliances like washers and dryers to heating and air conditioning, unexpected costs can add up. We once received a bill for two ice machines, and I was shocked by the amount."

There are several ways to establish an emergency fund. If you employed the cash-stuffing methodto eliminate debt, you can continue the practice by transferring money into a savings account. Additionally, you can allocate any unexpected cash windfalls, such as annual bonuses or tax refunds, directly into your savings rather than immediately spending them.

Regardless of the method you choose, Cruz emphasizes the importance of setting realistic expectations. She states, "It requires a certain level of maturity to face the facts and acknowledge where you stand financially. No matter how frustrated or upset you may feel, you need to work towards the numbers and goals that align with your current financial situation. This may not be the dream home you could have afforded four years ago, but it is the home you can have today."

By following these crucial steps of eliminating debt and establishing an emergency fund, you can significantly enhance your financial standing and set yourself up for a successful and stable homeownership journey.

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