Hi everyone, first time poster here, FTHB, I apologize if this question has been asked before and I apologize for my ramble/rant. I’m also on mobile, apologizes if it looks off.

Back story: Found home in early December 2018 (SW Michigan area). It is a foreclosure with no appliances. I checked it out and it looked great, so I made an offer of full asking price same day ($159,900). My realtor found out there were other offers, so he suggested making an offer of $172,500 with the seller putting 3% towards closing costs.

Late January 2019: they approved our offer! Both parties sign a million contracts and I send in my paperwork for underwriting.

Early February 2019: Inspection occurs. Inspector determines that the water heater will need to be replaced as well as a few toilets (3 bed 2.5 bath). Appraisal done a week later, comes in at $172,500.

Late March 2019: FHA comes back and says that the water heater and toilet needs to be fixed before we can move in (at the time, had a regular FHA loan with a $7500 FTHB down payment assistance loan. The bank comes back to us and says that they will not allow us to fix anything. The only way I can move forward is if I drop my down payment assistance loan and switch my type of loan to a FHA 203k loan so that the repairs can be done. Really crappy, because I am now having to put down 60% of my savings instead of being able to use that loan and save my money for appliances and what not. So I do it, I really want this house for me and my two kids. I order appliances, the contractor turns in the bid, underwriting gets everything they need from me and it’s all good. Until...

Monday: My loan officer emails me my realtor and the seller’s agent to tell us that FHA will only fund 96.5% of the loan, and that the seller is going to have to come down $4k so that I can get the funding and the repairs can be made. The sellers come back and tell me yes, they will lower the price except they are taking the $4k back from the concessions that they were going to give to me. So at the end of the day my LO calls to ask me if I had any more money to make up the difference and I burst into tears. I asked him why was the bank being so greedy when the offer is way over the sales price, and he was shocked! He said he didn’t know that and that him and my realtor both will fight for me!

So my questions:

1) Can the seller walk away from me? 2) If they do, would I get my earnest money deposit back?

TL:DR - Put an FHA offer in on a foreclosed home and the bank refuses to let me do repairs even though that’s what FHA requires, then we asked them to lower the price due to the FHA funding and wondering if asking them to do this caused me to lose the house.

I love this sub and you guys, thank you for your help!