I would discuss this with your loan officer immediately. The sooner the LO knows the better chance they have to address it with the underwriter "if" it comes up. You'll likely need to write a letter of explanation and provide proof that the collection was a mistake and shouldn't have appeared.
Paying off collections will drop your credit scores. Credit scoring modules treat it as a new activity on the collection - impacting your credit score almost as if it were a new collection. I don't think there's much the credit repair company can do for you to repair the damage done. I advice my clients to avoid credit repair companies as most do the wrong things (like paying off collections or disputing accounts) for folks who are in the mortgage process or considering a mortgage.
I would let your loan officer know and find out if your credit report will have a hard or soft pull prior to funding. It's possible your lender may be able to do a rapid rescore (if needed) to bring your scores back up.
Are you doing conventional or FHA financing? FHA is not as credit score sensitive as conventional. How low did your score drop?
I've written an article about this on my blog - I've included a link for more information.