unless your contract is still "contingent on your obtaining a mortgage" it doesn't sound as though being denied, would give you a legal escape clause to exit the contract.
your earnest money would remain at risk, and you might find yourself on the receiving end of a lawsuit from the seller to perform. [specific performance].
Now is the time you should be consulting with a real estate attorney, to find out if you have any legal escape route.
Interesting what we learn about others in the local marketplace on here.
First and foremost you NEED professional legal counsel and possible representation, which I can not and will not provide. That said, I will provide my OPINION, which again is not legal advice...
I doubt you are committing fraud, but failure to perform in a contract CAN have legal consequences. There may be an argument for fraud in a case where someone is representing that a borrower doesn't qualify for a loan, when in-fact they do. I don't know if that is happening here, but just a thought.
I will add one last nugget ... neither the real estate brokers, or agents, should be parties to the contract. Thus, I don't see how someone who isn't a party to the contract can sue someone on the opposite side who is a party to the contract? I suppose stranger things have happened, though.
Please keep us posted on the outcome. Best of luck to you.
However, I noted that you entered into this contract without the assistance of a real estate agent. My advise would be that if you chose to pursue home ownership in the future, there would be benefit in inquiring about the services of a reputable agent. A properly negotiated contract can make all the difference in the world in protecting your interests.