Without seeing the contract and knowing the facts it is impossible to determine who is in default and/or if the agent dropped the ball.
You are going to have to get an attorney. The contract in CO provides for mediation first. Hopefully, that is as far as it will go and you will be able to recoup some of the loss.
Has the agent (I'm assuming there is one based on your question) offered any resolution? You might try one more time and see if the agent can help produce results.
Don't give and good luck finding a place to buy in CO when this mess passes.
It really sounds like you need to have a conversation with a real estate attorney. I would guess the reason the sellers feel that they deserve your $1,000 is because they had to wait so long. Was your purchase agreement contingent on financing? If so when you were not able to get the conventional loan, I am not sure why the funds were not released back then. However, you are in a different state so perhaps it is done differently there.
Yes. My best advice is talk to your buyers agent, the broker and a real estate attorney.
I hope this information helps! Best Wishes!