Does the color in the bottle, say German Panzer Gray,have to be lightened to scale the color down to 1/35?or do people just use the color straight?

It would depend on the paint brand used, but as a general rule of thumb yes, colors generally need to be thinned to be "in scale." That being said, I would spray first onto a scrap piece of plastic or paper, then check if that's the color you think looks correct/matches with your references. Good luck and happy modelling!

-Alan