First, have your agent fight for you regarding the escrow cancellation fee. Since you were willing to proceed with the transaction, but the seller would not complete the repairs to allow you to get your loan, your realtor should argue for a full refund of your good faith deposit. I have done this many times and succeeded in getting my client's money refunded in full.
Now for a few pointers when you are buying FHA, so you can possibly avoid a repeat of this incident in the future. FHA has rules and guidelines for granting loans. One of the big guidelines for the appraiser is to determine that the property has NO Health and Safety issues, which include peeling paint, large holes in the walls, leaking roof, improper kitchen and bathroom plumbing, etc. You and your agent should be aware of these guidelines and prequalify each home accordingly. Then, if you move forward and get an accepted offer, make sure to get your home inspection done right away (within the first 48 hours of the contract). This will help point out Health and Safety issues you might have missed. At this point you are into the transaction about $300 (for the inspection) and may not even have your funds into escrow yet (as you have 72 hours from contract acceptance to get that done).
Based on your inspection, if you suspect that there will be FHA required repairs, this is a great time for your agent to speak with the listing agent and see how much the seller is willing to pay towards these required repairs. If the answer is $0, you have now saved yourself from a major headache and it only cost you $300 plus or minus. We never order the appraisal (which costs $450) before we have taken these steps.
Once again, have your agent fight for the refund of your FULL good faith deposit. And then thank you lucky stars that you were saved from buying a money pit for the small cost of an inspection and appraisal. Dare to Dream.
Shel-lee Davis, CDPE, SFR, QSC
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty