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My wife and I are planning on buying a house in 1.5 years from now. We are going to be applying for a home loan in the month of May, 2019. We have a few things we know for a fact we need to take care of. But I'd like some advice on anything else I could do to improve my chances.

Our plan is, we are getting two decently big tax refund checks. We are thinking of paying our car off this February and putting the rest of it in a savings account of some sort and save it for the down payment in our house.

Points to note:

  1. My credit score is in the low 600's and my wife's is in the mid 500's.
  2. I have 2 credit card balance in collection, amounting to $3000.
  3. My wife has 1, for $3500.

Our current plan:

  1. We are going to pay the car off, which is a $2500 balance when we get our tax refund check.
  2. We are going to call the debt collectors and make payment plans with them when we get our tax refund check.
  3. My wife doesn't have an income, so we are planning on just going for the home loan with my name on the application. Lenders don't seem to care about my wife being in the application since she doesn't have an income.

Our savings ideas:

We were thinking of opening a normal Certificate of Deposit (CD) account for this tax refund check so we are not tempted to spend it.

The question:

Is there a smarter way of putting this money to good use for the next year before we need to spend it?

We've already looked into several different savings options. My question is not directly concerning the pros/cons of savings options. It is more so about increasing my chances of approval for the mortgage loan when I apply.

My question is directly connected to banks maybe offering some kind of accounts or benefits that will make us look good in our home loan application.

Maybe if I were to open a savings account with the bank I hope to get my home loan from, when we apply for our loan, would they look at our savings and go "Oh you've been good about not spending all your money, I trust you"? Or are there accounts specifically targeted to people trying to prove their trustworthiness?

We are based in the US. I can provide more specific information regarding our location if needed.

Thank you.

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    @CrazyCucumber why do you still have $6500 in "hair on fire" high rate debt when tens of thousands of dollars is sitting in an account somewhere? – RonJohn Dec 12 '17 at 13:51
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    Your credit score and current high interest rate debt are warning flags (which is no coincidence - the fact that you have cards in collections is a big reason why your credit score is so low). Pay off your debt, and save for a down payment - this will naturally increase your credit score and put you in a more stable position to afford a house. – Grade 'Eh' Bacon Dec 12 '17 at 14:03
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    Also - it sounds like you may have a 'spending' problem. I say this because credit card debt indicates living above your means. You are also falling into a classic trap of only investing 'future' money. That is, you aren't investing a committed part of your paycheck every 2 weeks, you are only 'committing' to invest your tax refund you'll get in a few months. That won't be a sufficient savings pattern to save for a down payment. – Grade 'Eh' Bacon Dec 12 '17 at 14:05
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    @CrazyCucumber but you say that you will have 20% DP. Will you really save tens of thousands of dollars in 18 months above and beyond your current debts? – RonJohn Dec 12 '17 at 14:15
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    I agree with the others that cleaning up your collections should be priority #1, but paying collections off can actually hurt your score. Depending on the situation, you may be able to convince the collector to do a "pay for delete". A PFD means that the collection disappears from the report (doesn't affect score) -- as opposed to showing up as a paid collection (reduces score). – Eric Seastrand Dec 12 '17 at 16:49
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If it was me, I would work on getting the collections debts cleaned up before anything else. When you get your tax refund checks, call them and offer them between .50 and .75 on the dollar. Write one check not make payment plans. Get it in writing that the debt is settled. Don't give them access to your checking account, and if you do use a CC, to pay the debt, use one of the prepaid ones and then never use it again.

Paying off the car loan is a good enough plan, but secondary to having the collections cleaned up.

Your verbiage indicates a bit of an incorrect attitude towards getting a mortgage. You want to be in a financial position where the bank welcomes your mortgage business, that there isn't a chance of being turned down for a mortgage. Banks are far to risky in their lending practices. If they deny you a mortgage, then you are in no position to own a home. Often times they will approve you when you are not in a position to own a home.

Get those collections clean up, then reevaluate six months after that.

Getting a CD is an okay plan, but it will not dramatically change your financial position. If you had 50K today, the interest you earn could be about $1200 in about 18 months. It is more important to have the 50K.

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    +1 for "paying off the car is secondary". I did not think of it like that. I was thinking of it like "oh if I pay my car off, I can make payments on my credit card easier". But yes, I see what you mean. – Crazy Cucumber Dec 12 '17 at 14:14
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    Doing in that order also gives your credit score more time to "heal" from the collections. – Pete B. Dec 12 '17 at 14:20

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