For FHA financing, you also need the FHA Addendum, without it, you should receive your earnest money. In terms of not passing the FHA appraisal without YOU doing "a lot of work", unless you signed some agreement, there is nothing to compel a buyer to put one ounce of work into a home before purchasing. If the seller chooses NOT to bring a home into compliance of FHA, you get your $$ back. You should still have an appraisal contingency even if your loan contingency has passed, and perhaps even a home inspection contingency. Either will cost you a bit, but I am guessing if one or the other gets your earnest money returned, you will be happy.
I would also consider firing your loan officer. It sounds like they are doing you no favors.
Best wishes, Jim
Bottom line it's in the terms of the contract and laws within your state. I am a Realtor not an attorney and to get a legal opinion based on the laws within your state you will need to contact an attorney if your Realtor is not able to negotiate and work out the terms of the "release" of the contract and earnest money. Typically for earnest money to be released to any one it has to have a release signed by both buyer and seller agreeing to the disbursal of funds. That being said:
Does the purchase agreement specifically state conventional financing?
The confusion appears to be what was actually in the purchase agreement and what was provided by the loan officer and was submitted with your offer.
Typically if the purchase agreement states subject to conventional financing that would be the contingency you did not meet. However it appears the preapproval provided was for FHA and that is what the sellers and their agent have actually seen so they do know you can qualify for the loan via FHA. If the contract clearly states conventional and the rejection letter states you do not qualify for the loan the preapproval letter was for, then the financing contingency is not met.'
Was the FHA appraisal completed? If so, and you are listing the items that were made contingent for the financing as listed, it doesn't mean you have to do the work to get the loan, the seller owns the home and plays a part in the process as well. The only way you can even do the work is with the seller approval.
If this is a little bit of buyers remorse because of the amount of work pointed out to you, if the seller completed the items necessary for your to obtain financing would you still be interested in the home?
As you can see there are a lot of factors you should think through and review with your Realtor if you have one. If you are unable to come to an agreement you will need to consult an attorney to have the situation reviewed and advise you on your options available to have your earnest money returned.
Good Luck! Buying a home is not for the faint of heart as it is an emotional roller coaster with a large price tag.
Cindy Schlee, Realtor
Grand Rapids, MI