The agency she was buying through provided the cash, I believe buying the house, then reselling to her in some fashion. 

Likely nothing about this process will make you look good (assuming you can correctly identify which results really are your applicant).Assume, for one moment, that somehow/someway your application process comes under the scrutiny of a highly motivated and adverse attorney (private suit or government agency). 

The rep at the collections agency said they do not remove paid debts from the credit report, but I know this is often done.

The tenant doesn't seem to be the type who would pay and he didn't show up in the LTB meeting, should I try a collections agency or go straight to the legal route using small claims court and garnishment of wages?

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One of the mainstream options out there for you might be FHA - FHA requires a minimum down payment of 3.5% but also, (one of your other replies mentioned buying a multi-family property), allows for 1-4 units (as do many loans) but you do need to live in the property. 

Can we please get some recommendations on a great agency she should consider working with that has a great team, training and perks in the Clearwater/St Petersburg area?

If you later want to do a cash-out refi with agency debt, you'll need to put them back in your name and season them for 6 months.

Try to relax, hire an attorney and make sure you immediately abide by some legal obligations you are most-likely not aware of e.g. you may need to file reports with some government agencies and you may be required to provide your tenant with some types of benefits e.g. money, or whatever, but if you fail to provide your tenant with some things you will look like an animal in court and a jury will hit you hard with damages.Sorry!  

That could happen if you work with a temp agency for example.