Real estate contract is ALWAYS between the SELLER and the BUYER â€“ the sellerâ€™s lender is NOT a party to a real estate contract.
The seller holds the TITLE to the property and is the legal OWNER of the house, unless the lender forecloses.
The sellerâ€™s mortgage loan is only between the seller and the sellerâ€™s lender â€“ the buyer is NOT a party to the sellerâ€™s mortgage contract.
Just because the seller is upside down on the mortgage and the lender did not approve the short sale, it does not mean the seller is out of options. The seller can 1) stay in the home if the seller is able to continue making mortgage payments, 2) bring the funds to the settlement if the seller can afford it, 3) qualify for the employer assistance program if relocating, 4) participate in cash for keys program, 5) file for bankruptcy to avoid short sale judgement, etc.
The point is the real estate contract is between the seller and the buyer and is RATIFIED by the seller and the buyer.
In your case, the contract was contingent on the sellerâ€™s lender approving the sale since the seller was not able to pay off the mortgage in full â€“ the same way that home inspection, HOA documents, appraisal/financing, or selling buyerâ€™s home are contingencies on the buyerâ€™s side.
I think that confusion is caused by the EMD check. The LAW requires agents to deposit the Earnest Money Deposit check within 5 days after the contract is RATIFIED by the seller and the buyer. UNLESS a buyerâ€™s agent writes a clause into the contract that the EMD check will be deposited after the short sale is approved by the sellerâ€™s lender, the EMD check MUST be deposited in the escrow fund within 5 days after the contract is ratified by the seller and the buyer. This is the federal LAW â€“ brokers have a legal obligation to report agents who do not deposit the EMD check in the timely manner.
If your agent wrote into the contract that the EMD check will NOT be deposited until the sale is approved by the sellerâ€™s lender, your EMD check should have NEVER been deposited in the Escrow since the lender did not approve the contract at your price; instead the lender came back with a counteroffer which you have NO legal obligation to accept.
The sellerâ€™s lender has NO legal right to your Earnest Money Deposit check â€“ neither does the seller, since the contract is voidable at your option.
Another â€œloopholeâ€ in the federal policies which unnecessarily ties up buyerâ€™s money in the Escrow and hinders commerce?
You need to contact your agent/broker as they are able to give you the best advice since only they know the details of the contract.
Vivianne's answer was perfect. Third party approval is just a contingency. Every time we write an offer involving a loan, we have a third party contingency on the buyer side and that would be the loan getting approved. The contract is turned in, EMD is deposited in accordance with the law. If the third party did not approve the sale, that contingency is not met and you ask for a release and request your EMD back.
Just because the seller signed your purchase agreement does not mean that your contract is ratified. Your agreement need a "third party approval" before it can be ratified. If you and the bank do not have a meeting of the minds than you have no contract. Your check should be at your agent/broker's office. I usually just email the bank with my client's intent to withdraw. Checks are only deposited after full ratification.
Hopefully, you had time lines placed in your counter offer, maybe your agent used a counter offer addendum that has a built in response time. Also check with escrow, even if the seller signs off on the rescission, escrow may have a 30 day period to hold the funds.
Always build in contingencies and time lines to protect yourself!
Best of luck.
Sorry for the confusion, I deleted my original answer because I did not read the question correctly.
In short, it depends on what your contract states. I am not sure if the contracts in VA define a time frame for the seller to sign a release when the buyer is requesting one. Most often times it does not cover response times from the seller when the release is being requested because of the actions of a third party. Or the contract might afford the seller a "reasonable" time frame to respond. I would read your contract and look to your agent for advice. You should receive the refund of your EMD within a few days of the seller signing the release. If the seller refuses to sign a release, you could be in for a long haul which usually ends up in small claims court. That will depend on the laws and customs in your area.