Collection and Mortgage Loan Application

[Ausfarm]

My fiance and I are planning on applying for a mortgage together.  Our problem is my fiance has a CA reporting a medical collection.  The CA just started reporting Nov. 1, 2007.  My question is, will this affect our loan application if his credit score even w/ the collection is above the credit score needed to get prime rates (his middle credit score is about a 670, but we think after a few other things get updated, he'll be at a 680)?  We've tried a 50% PFD to the CA and the OC --thinking they would negotiate and maybe meet somewhere in the 75% range, but neither bit.  We tried asking the OC to take the collection back b/c there was a history of payment, but the OC said no.  I guess we'll just have to live w/ it and pay-it-off at our convenience, but I'm worried that we'll be shut out of prime loans w/ this collection out there. Is that true?  Does it just depend on the lender? 

I'm interested in getting the best possible rate we can b/c we're going to build and we're already going to be paying a premium for that.

[ShanetheMortgageMan]

It won't be a factor for FHA (since it's medical) & Fannie Mae, but if it's over $5k then it'd be an issue for Freddie Mac.  Fannie Mae permits collections/charge-offs of any amount to remain unpaid on certain (which so far I've found to be all) approvals when buying a 1-unit owner occupied home.  Lenders who don't use Fannie Mae or Freddie Mac usually have a limit of $500 or $2,500 in collections that can remain unpaid.