Purchasing a home with little down and bad credit will require that you find a lender with liberal lending policies. The task may be difficult, but it is possible to purchase a home with about 5 percent down and less-than-stellar credit. Loans guaranteed by the Federal Housing Administration may be your best bet. FHA-insured loans protect the lender if you default. That allows the lenders to be more liberal with their lending policies.
Figure out how much you have for a down payment, and pull your credit reports from the three credit bureaus—Experian, TransUnion and Equifax—via myfico.com or another vendor. Determine if there are any steps you can take in the short term to improve your score. Perhaps there are some charged-off accounts that you can still pay off. Work with your creditors to address any issues you have the means to resolve.
After you have addressed your finances and credit, start calling around to mortgage companies, banks or credit unions. Tell the loan officer about your credit scores, recent credit history and the cash you have on hand for a down payment. There's no need for a formal application or credit check while you're shopping around, so hold off on that. The loan officer should be able to tell you if your available down payment and credit scores fit within the lender's guidelines for approval. Keep a list of all the companies that seem open to working with you.
Prepare for a second round of calls. This time, focus on lenders that are approved for FHA-insured loans. Find a list by visiting HUD.gov, and type in "FHA Lender List" in the search box at the top of the page. Click the proper link from the search returns, and follow the prompts to search for FHA-approved lenders in your area. Call some of the lenders and explain your situation. Keep notes just as you did in your first round of calls.
Compare your notes. Hopefully, you've discovered FHA and non-FHA lenders who may be willing to approve you for a loan. Go on to the next step if none of the lenders showed interest in lending to you.
Study your notes, and identify the problem areas. Contact a housing counselor for the U.S. Department of Housing and Urban Development (HUD) at 800-569-4287. The counselors can provide free or low-cost advice on buying a home. Explain your credit or down payment problems, and ask for help. For example, you may qualify for some of the FHA's down payment assistance programs. The HUD counselor may also be able to direct you to credit counseling to improve your credit scores.
Address any issues, if necessary, and apply for your loan.