Someone can correct me if I'm wrong, but I have a different understanding of when things fall off your credit report. The way I understand it, the 7 year "clock" can be the date of last activity (e.g. if you make an inquiry or dispute about the account, make a partial payment, etc.), but it is not dependent on when it was reported to a collections agency, when the creditor wrote off the debt, etc. The general rule, according to the FCR Act Section 605(c)(1), is that a debt can remain on a credit report for 7 years + 180 days after the delinquency that caused the account to go bad. Each state also has its own rules about how long things can remain on your credit report (you can look that up by state). More or less, as long as you didn't do something to start the clock ticking again, this item should no longer appear on your credit report, period, if the account was deliquent with no further activity (and no, the creditor sending you off to a collection agency does not count as new activity) as of 2000. A pdf copy of the FCR Act is available at
http://www.ftc.gov/os/statutes/031224fcra.pdf
I have a copy and have read it, and I would strongly urge anyone who wants to be informed about what is and what isn't allowed to be on your credit report to read it! Hope this helps! 
@Anonymous wrote:The way I understand it, the 7 year "clock" can be the date of last activity (e.g. if you make an inquiry or dispute about the account, make a partial payment, etc.), but it is not dependent on when it was reported to a collections agency, when the creditor wrote off the debt, etc. your credit report to read it! Hope this helps!
Date of first delinquency is always the date used to start counting the 7 years. That date doesn't change if you dispute or start making payments. So all collections/negative accounts should be gone 7 to 7 and a half years from the time you first missed a payment or made partial payment or whatever caused the account to go to collection. Unfortunately that's not the date used for calculating scores. The date of last activity affects that score and that can change if you make payments or something.
Anyway, wouldn't touch the collection until you get your mortgage or the lender requires you to handle it. If you have an account in active dispute, you likely won't be able to get a loan. Be aware you may not be able to get a loan with a collection that large even if it is old and perhaps not yours. So I would start the loan process early so you have time to handle it if it needs to be handled.