Veronica,

Wow I am sorry this has happened to you. This is indeed a tough and unfortunate situation. The MLS is typically not end all be all information and cannot be guaranteed and it is up to the buyer to verify all information. I think this is just one of those unfortunate circumstances, not neccessarily anyone's specific fault.

I think you should follow the direction and advice of your realtor and their broker. If the seller doesn't release the earnest money, in most cases I don't think the title company will allow them to sell it to anyone else. Of course they could sell it for cash and no title insurance. Probably the best thing for everyone involved is to resolve the title issue. Failing that, then it's a negotiation with the seller....maybe you can split the earnest money. You could argue that they are as much at fault as you are as they accepted a contract that included FHA financing that is not eligable.

If you had a contingincy on the purchase and sales that the sale was contingent upon financing, and you gave them notice within the stated periord of time you should be all set, if you didnt have a mortgage contingincy you may be in trouble, i have to say though, that this should have been caught a lot earlier than the day of closing. they should have done a title search, your loan officer should have asked for a copy of the deed when they took the loan. the appraiser should have looked at the deed when doing teh appraiser and your buyer broker should have made sure everyone had what they needed. you need to get a lawyer to review your contract and bring the copy of your loan denial. you also should have your agent do up a release of escrow form and include the denial letter hopefully dated within the dates on your purchase agreement