Most subprime lenders will ignore medical collections and collections that are over 2 years old. If however you want a conforming loan you will need to pay all open collections off at the time of close.
All subprime lenders, lenders for people with below average credit or whom need some type of creative financing, have their own guidelines on how to deal with collection accounts. Most of them will allow open collections up to 2,500 or even 5,000 to remain open. A few lenders will not require any collections to be paid off no matter how much is owed in collection accounts and others will require that all collections be paid off regardless of the amount. Therefore it is crucial to discuss your open collection with your loan officer and let him/her know of what your intentions are with the collections and if you want to pay them off through the loan or if you would prefer not to pay them off now. This may dictate which lenders you have available to use and get qualified for a mortgage loan with.
Request a free copy of your credit report to see if there are any collections on there that you were unaware of. This should be done well before the time you plan on getting a new mortgage. You may be able to dispute the ones that are incorrect, and this should help raise your credit score.
Even small unpaid collections can effect your credit score dramatically. To make sure your credit scores are as high as they can be, pay off any known collection accounts well prior to applying for financing. Many times a consumer will need to follow up with the credit bureaus after paying off a collection to ensure that the account is reported correctly as "Paid".
Open collections accounts can also be paid off in your refinance and rolled onto the loan itself.
Many non-prime banks have loan programs that ignore certain non-essential collections. However, borrowers of this type of sub-prime loans ought to expect to pay a little higher interest rates.