Technically FHA doesn't require it to be paid, but it is an underwriter's call.
If the cumulative amount of owing collections is $2k+ then capacity analysis has to be performed. Details at http://ficoforums.myfico.com/t5/Mortgage-Loans/FHA-changing-collection-account-judgments-amp-dispute...
Yup, if it's on a payment plan then it'll be figured into your DTI. I'd just wait until the underwriter says something, if at all.
The $500 earnest money deposit is applied towards your funds to close, correct. As long as your wife isn't on the mortgage then neither of those should be an issue.
You are welcome, glad it's helped.
No, an LOE isn't considered a dispute. Disputing it with the credit reporting agencies is considered a dispute.
Just out of curiosity, why would I need the letter of explanation if I passed the automated underwriting, and why would the LO tell me to keep them very simple and "generic"?
Because a human underwriter will always review your file and can ask for anything they want to complete the file. Auto underwriting is simply a process to speed up underwriting of files ... not to supercede underwriting completely.