Speaking as a Dad to two children, of which only one shares my DNA: The can of worms is now open, so you best get to putting a real and honest spin on things to your boy. And do it in a way that he won't ever feel like he was lied to.
My oldest boy's bio-dad had no interest in being a parent. They have met, but not until my boy was 16. I facilitated that. But I'm still Dad. The one that taught him to ride a bike, calmed his jitters before his first date, and stayed up all night at the hospital when asthma attacks happened. If the sperm donor had wanted a role, I'd have been thrilled. More people to love a kid that I loved? Great! I harbour no ill will towards the sperm donor - he gave me an incredible gift. I've had that kid my life for 14 years now, and am thrilled to have had that time.
And my boy knows that I chose to be his dad because it was what I wanted. Yep - I was there by choice - no other reason. That made it special to a kid that was maybe feeling rejected. He knows that I asked his permission to marry his mom and become his dad, and that while I could have adopted him legally without his required consent when he was young enough - I waited so that was to be his choice too.
But you're right - Don't lie to your boy. His Father just isn't able to be a father right now, but loves him enough to want whats best for him and to let him have a new dad. And maybe someday he'll be ready to be in your life and when that happens we'll welcome him back.
Don't badmouth the sperm donor - he's half of what made your kid. And maybe someday the kid'll be lucky enough to have two Dad's. Don't sell that as likely or give undo hope, but acknowledge that it is possible and if so you won't be an impediment to them getting to know each other. Mine wasn't that lucky, but he sure as hell knows that it wasn't because we didn't wish it for him. And in the meantime kiddo, Fiance want to be your dad and you want him to be your dad - so lets be the awesomest family ever!!
Yes there will be questions. Some you may not answer because they aren't yours to answer. It's not your place to speak FOR sperm donor when it comes to details, so just keep that as non-specific as possible but positive.
But yeah, it's time for a real talk because now the kid has questions that need answers. Its scary, I know, but he loves you and trusts you and loves the fiance.... you'll get through it fine.