Kevin O’Leary says first-time homebuyers should follow this 1 important rule — ‘otherwise you could really screw yourself’

“Otherwise you could really screw yourself,” he says.

This advice is a popular rule of thumb shared by many financial experts. The U.S. Department of Housing and Urban Development considers any family spending more than 30% of their after-tax income on rent, mortgage payments, and other housing costs to be “cost burdened.” Those spending more than 50% of their income are considered "severely cost-burdened."

However, the high cost of homes coupled with high interest rates is making this rule increasingly difficult to follow.

Housing costs

Nearly 19 million American homeowners were cost burdened in 2023, according to the U.S. Census Bureau. The report said one of the costs impacting homeowners was insurance — 5.4 million of the 85.7 million homeowners in the U.S. paid $4,000 a year or more for homeowner’s insurance in 2023.

The median sales price of houses was $420,400 in the third quarter of this year, almost $100,000 higher than it was in the third quarter of 2020, according to the U.S. Census Bureau. Meanwhile, the average 30-year mortgage rate is still relatively high at 6.7% and is moving in the opposite direction many expected it would after the Fed began its rate-cutting cycle.

First-time buyers decreased to 24% of the market share this year from 32% last year, per the National Association of Realtors (NAR). This is the lowest share since NAR began collecting the data in 1981. The median first-time buyer age also increased to 38 years old this year from 35 last year, while the typical repeat buyer age also increased to 61 years from 58 last year.

Potential solutions for first-time homebuyers

Potential homebuyers entering the market for the first time could plan ahead to avoid the most common pitfalls.

The first step is to research government grants, bank grants, non-profit grants and any other assistance that is available to first-time homebuyers and homebuyers in general. For example, the Fannie Mae HomePath Ready Buyer program provides up to 3% of the purchase price in closing cost assistance toward the purchase of a HomePath property.

Nearly 40% of recent homebuyers said they went over their budget when buying a home, and 47% said they “feel in over their heads financially since purchasing their home,” according to a HousingWire survey. This could potentially be avoided by adding a margin of safety to your budget. Look for a home that costs only 90% or 85% of what you have been approved for to leave room for unexpected costs.

Moving from an expensive community to a less expensive city or state can help reduce your housing costs. “Relocations are holding up better than in-metro moves largely because homebuyers are searching for affordability, and remote work gives many Americans the freedom to move. Nine of the 10 most popular migration destinations have a lower median home-sale price than the most common origin of homebuyers moving in,” said a September Redfin report.

However, if you’re unwilling to compromise on your budget or move elsewhere, the only way to meet the 30% target is to boost your income. A side hustle, new business, or rental income from a spare bedroom could help you more easily afford your dream home.