As I write this (spring 2007), the payments are coming in late on one out of eight sub-prime mortgage loans (the loans most likely to go to those with credit problems). As many more of these loans have their interest rates adjusted upwards, the problem will only get worse. At the moment tens of thousands of families are losing their homes each month.

It does you no good to be able to buy a home if you can't afford to keep it. Since the primary way in which you buy a home with bad credit is to pay higher interest rates and other costs, be sure you can afford it. Buying a home, by the way, does not always make sense even if you can afford it.

When rents are low relative to home prices, you are often better off renting, especially if you invest the money you save. Suppose small homes in your area rent for $750 per month, but sell for $190,000, as is the case in Tucson, Arizona, for example. With your mortgage payment, taxes, insurance and maintenance it can cost twice as much to buy versus renting. Rent and bank that $750 you save each month, and you may be further ahead in a few years, especially now that the price appreciation has slowed.

If you decide that owning a home is the right way to go, the first thing you should do is fix that credit report. A better credit score means a lower interest rate. Paying 2% less will save you more than $70,000 in interest over the years (based on a 30-year $140,000 loan). Some ways to fix that bad credit report follow.

You need to see what's on your credit report. Search for "free credit report" online and you might still be able to get one for free. If you've been denied credit based on a report from a local credit reporting agency, you can request a free credit report from that agency within 30 days.

Any inaccuracies on the report? Write a letter to the agency explaining exactly what is incorrect. Include copies of canceled checks or any other documentation, and send it all by certified mail. By law, the agency must contact the source of the disputed information, and if they don't receive confirmation of the debt within 14 days, they must delete the item, and send you an updated report. If asked, they must send a corrected report to all creditors who received your credit report in the previous six months. It won't be done automatically, so be sure to demand it.

Often, if the item is only a few hundred dollars, or over a year old, creditors often won't even bother to respond. Since the item must then be removed, "fixing" a credit report is possible even if it is correct to begin with. You can also dispute the item again after 30 days.

Even if you have to buy a home with bad credit now, you might be able to refinance at better terms in a couple years if you start working on long-term fixes as well. Pay off credit cards each month if possible. Limit yourself to five credit cards or less. Keep the balances at less than half the limits on the cards, transferring debt from one card to another if necessary. If you stop doing things that lower your credit score, time alone will help raise it. In fact, many items will be automatically removed if they are seven years old.

The obvious way to buy a home with bad credit is to just keep looking until you find a bank or finance company that makes these high-risk loans. Unfortunately, high-risk to them means high interest and fees to you. To avoid that, consider the following ways you can buy a home.

- Buy on a lease option. Some sellers will lease their house to you with an option to buy. A portion of the lease payment should apply towards the down payment for the home. If $250 of the rent applies towards the down payment, after two years you'll have a $6,000 credit to help you with the down payment. Two years might also be enough time to correct your credit, and so get a better mortgage loan.

- Look for or ask for seller financing. Sometimes a seller is willing to provide the financing you need. This could be in the form of a "contract for sale" or an owner-carried mortgage. Bottom line? You can make payments to the seller instead of the bank - with no lending fees and lower interest.

- Think creatively. I know of a case where the landlord was anxious to sell his four-plex, so the buyer offered him full price if he would carry the financing, and take a low down payment. Closing was arranged for the first days of the month, so the buyer's small down payment came from the rents that were credited to him. He then moved into one of the units the following month when a tenant moved out. There are many other creative ways people have found to buy a home with bad credit or even with no provable income.