What happens now?

I hope someone can help me with this unfortunate situation.

The Situation:
I put a 4plex under contract about a month and a half ago, and it was supposed to close this coming Wednesday (8/31). This whole time I have been under the impression that the loan was going to go through just fine. Now 5 days before the closing date, my mortgage broker tells me that the lender is not accepting the loan because they don’t like the source for my downpayment (the sale of my fiancee’s house which was not in my name) and they will not give me the loan anyway because I have a collection account on my credit report. He starts offering me some other loans which will not cash flow as good as the loan I previously expected to receive. I am not interested in the alternatives, and actually the original loan left something to be desired in the cash flow anyway.

My Questions:
Am I able to walk away from the deal? It is well past the period specified on the 3rd party financing addendum in which I have to notify the seller that I am not able to get financing. Who will get my earnest money? Will the seller have grounds to come after me with a law suit? If I am not able to keep my earnest money, should I be able to ask my mortgage broker, or his lender to compensate me for this, as it was not my fault that the deal fell through after the deadline. I was of the understanding that everything was ok with the loan.

Howdy TravisTx:

It never hurts to ask for the earnest money back from the seller. Both parties have to sign the form for the title company to return the money to either party. The lender or mortgage broker is not responsible. The seller will not sue you for specific performance but will want a release from the contract where they will be able to sell to someone else.

Travis,

At this point the seller has the right to keep your earnest money and sue for specific performance, you thought everything with your loan was ok, and i am sure so did they. You may want to try to make this work with this lender or another in order avoid the possiblilty of not performing, or you could be honest with the seller, very apologetic and ask them to release your contract and keep EM as damages. What is your agent advising? I would move onto next deal with much better preparation.