Also, look at the transaction from the side of the seller. How long did the seller have to pull the property off the market? If the owner had pulled the property off the market for 10 days then you would be within a reasonable period of time. If the owner had pulled the property off the market for 90 days while the VA was doing their work only to have it fall apart at the last minute then the owner has lost 90 days of marketing and made 3 mortgage payments.
If you and the seller cannot come to an agreement then you would ultimately have to go to court to get your money back but it could easily cost you 1k-2k in attorney fees.
How much earnest money did you put down?
I agree with Charita, have your agent set up a meeting between you, your agent and your agent's broker.
I'm also guessing that they don't actually have your earnest money, but it is being held by the closing office?
Has the bank now approved you for the mortgage? It's a shame to have come this far and have it all fall apart, If the appraisal is close to the contract price, the best solution would be for you and the Seller to agree to the appraised value in writing and everyone to proceed to closing.
You don't mention whether you and the Seller signed an extension of the contract. If you are now beyond the latest closing date in your contract, then you and the Seller would need to either agree on a new sale price and closing date, or both sign a cancellation of contract and release of deposit.
Your earnest money deposit is most likely being held in escrow by either your real estate agent's company or the closing agent (title company or lawyer). If you and the Seller have a dispute over the funds, this should be resolved before the funds are disbursed. Different states have different procedures that must be followed if the funds are held by a real estate company.
What does your Realtor say about all this?
All the best,
Maggie Hawk, REALTOR
Watson Realty Corp.
If there had been sufficient warning that the closing would not take place on schedule, then ideally an extension addendum should have been added and the terms of the earnest money would have been clarified in the addendum.
Not knowing the full set of circumstances, it may be likely that your contract called for the seller to be notified if you were changing lenders. If this is the case, this could have changed everything.
You should have a discussion with your real estate agent and have your agent review the contract with you regarding to the earnest money. If the agent is not the broker, then perhaps your agent should get her broker involved if you feel that you did everything possible (on your part) to ensure a close.