I could pay off the 7,000 debt on credit first, open a Vanguard account with say 5,000 and put the remaining 8,000 or so into a down payment fund that we can hopefully continue to add to.
^^
This sounds like a great plan to me.
My preference would be to pay off the car, too, to get rid of the monthly payment. There is NOTHING as wonderful as being free of a $500 per month payment, and if you have tight cash flow, that will help a lot emotionally. Add the $500 per month to investments instead. If your interest is very low on the car, maybe you are ok with it, but everyone I know that worked in Alaska Fishing used it to buy cars free and clear in the fall, and the smart ones had money left over to invest. Aim to NEVER have a car payment again. EVER.
I assume here that you already have an emergency fund, or are willing to tap into your down payment savings for a true emergency. Keep at least $1k float in your checking at all times, too.
As we have been on an upward trend for a while, any money that you want access to within the next 5-7 years should be conservatively held, IMO. I have been burned by drops in the market before, and it is much better to earn less additional money than to lose 25% when you need it.