Dear Starting Over,
How bad is your credit score? The reason I ask is that the Federal Housing Administration, or FHA, loan underwriting standards allow borrowers to obtain financing for homebuying even with less-than-perfect credit. FHA requires new borrowers to have a minimum FICO score of 580 to qualify for FHA's 3.5 percent down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10 percent.
The reason I want you to look into FHA financing now is that by waiting two years, you may put your credit in better shape -- but you'll miss out on today's low housing prices and historically low interest rates. I'll admit I don't have a crystal ball and can't predict where housing prices or interest rates will be in your market two years from now, but I don't think waiting is the right strategy if your credit is good enough to buy now.
If rates stay low and your credit score improves, you'll have the opportunity to refinance. Taking the risk that interest rates and housing prices stay low for the next two years while you wait to rebuild your credit has a low probability of being your optimal strategy.
To answer your question about where to invest your money in the short term, you don't want to take on much, if any, risk to principal when setting aside money to finance a short-term goal. You should go for low-risk, safe, short-term investments. Don't swing for the fences chasing yield when the goal is to keep the money safe and available to finance that down payment on your new home.