Pay the things off that matter. You may ask how do you do that? Consult with your lender to get a good grasp on what they're looking for. Most financial institutions will require that you settle, bring current or pay off certain things entirely before you can buy a home:
accounts in collections
state and federal tax liens
past home loans or lines of credit in default that were not extinguished through foreclosure or short sale (e.g., second loans, home equity lines of credit, etc.)
defaulted federal student loans (for FHA loan applicants).
When you're in negotiations with creditors to make settlements believe it or not you are in a position of power. Ask the creditors if you can settle with terms. The terms being based on this payment you agree to delete the corresponding account off of my credit report. This method doesn't always work but its worth a shot.
Another important thing is to prioritize the various items on the credit report. For example, some lenders might allow you to simply settle a tax lien at closing, while most FHA loans won’t allow for a credit pre-approval while you have a defaulted federal student loan on your report.
Nevertheless don't just go all willy nilly paying off debt. It may seem wise to take the opportunity to pay your debt off and close out old, unused accounts, thinking it will score extra brownie points with perspective lenders. However this is not the case always. Credit scores are calculated based on available credit and credit utilization. FICO score calculations are reportedly maximized when you have 30 percent of the credit available to you on your accounts. So don’t pay them entirely off, and whatever you do, don’t close accounts that are open and/or current.
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