Can a company legally change an account listed on my credit report as charged off to collections just because I applied for a home loan?

If I understand you correctly, this company found out you applied for a home loan, and so they reported to credit rating agencies that they had put your debt into collections to mess with your home loan, so you would pay them off?  If so, the answer is that if they really did put your loan with collections, then yes, they can legally report that, regardless of their motivation for doing so.  If, on the other hand, they reported putting the debt out for collections when in fact they did not, they are not within their rights.  You should immediately alert the credit rating agencies to this and attach a note to your files.