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My dh and I are in a very similar situation. Horrible credit left over from graduate school a few years ago, and a new job which pays closing costs. We were able to get a good rate (5.375% on the 1st mortgage) with only 5% down with one of the required banks. We had to pay off old debts, but this actually raised our scores, contrary to most advice. They went up because our amount of debt went down. Check with the lenders to see what they suggest in your particular case. If you pay off debts, do it at least 2 months prior to closing. Good luck.
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