The advice below is good: Find a good, reputable mortgage broker you can work with. Determine how best to raise your credit score and to qualify for a decent loan. And determine a feasible time-line. One year? Two years?
Beyond that, though, is the actual strategy of buying the home that you currently rent. Since you aren't going to be able to approach the owner and say: "Mr. Owner. I'd like to buy the home we're renting. Can we settle in 60 days?" you should have a strategy to get agreement now, and to purchase when your credit allows you to.
A lease-purchase would be one workable strategy. After all, the owner is already leasing to you. You just have to reach an agreement that you will be able to buy the property from him/her within a specified amount of time for a specified amount of money.
A lease-option would be another strategy. An option wouldn't bind you to purchasing the property; it would give you the right, but not the obligation. However, since you live there and you're happy with the house, and appear to have thought things through, a lease-purchase might be nearly as good as a lease-option.
A contract for deed would be another strategy and, while I'm not terribly enthusiastic about them, they're very popular in certain parts of the country.
The same end result can be accomplished with a land trust. More info at http://www.landtrust.net. Basically, the owner would create a land trust and move his property into it. You'd be named the resident beneficiary of the trust. At a point in the future, the property would be brought out of the trust, and you could purchase it. A land trust is safer than a lease-option or even a lease-purchase. Most of the paperwork is done up front, and the property would also be protected against liens, suits, and judgments filed against the owner.
Finally, the owner could simply sell the property to you and take back financing himself. Rather than you getting financing from a bank, you'd make your payment to the owner every month. That's something he might be willing to do now, even with your low credit score.
So, lots of options. Lots of hope.
You are going to find it likely impossible to find financing at this time unless you improve your scores quite a bit. Pay off collections or debt and continue paying your bills on time for the next six months. At that point you should be in a better position to qualify for a mortgage. Scores below 600 are finding difficulty in getting financed.
I know you have been given plenty of assurance that you are in a situation that can lead to homeownership. If you are interested in working with someone in your backyard, please feel free to call. I am a Perry township resident and a licensed loan officer. Feel free to check out our Web site as you shop around for best situation for you and your family. You can reach me at 330-705-8564.
Best bet you can make now is to get with a REPUTABLE, local mortgage broker who can assist you in putting your credit rating in order. There are enough good people who can help you for free that you may want to explore these avenues fully before you get involved with one of these Credit repair for hire firms.
If you would like call me or e-mail me through my website at http://www.CallRealtorJohn.com for the names of some people who may be able to assist you.
It can be tricky, so get with a loan officer that you know is trustworthy, not one that advertises the best deal always as a bait and switch tactic. You can always buy the home on a lease purchase while you are cleaning up your credit if you want, that way, you are putting money toward the home. If you need help with that, let me know and I will refer you to a good agent in your area that can help you with that.
Also, I have some tips on repairing your credite if you want, so let me know and I will email it to you. my email address is firstname.lastname@example.org
Hope this helps!