Can the current home owners legally keep my earnest money if I was found not to be qualified?

The answer to your problem can be found in your purchase agreement. If your purchase agreement covers how a refund is handled then it will control. For future dealings always make sure your purchase agreements outline how the parties will handle refunds. If you did not do so in this instance try to get approval for your mortgage loan amount prior to shopping for your home, and do not go out and run up your credit while you are shopping around. Pre-approved loan amounts give you more bargaining power and help reduce situations like this denial of your loan. However, even with a pre-approved loan you can still be declined when you apply for the actual purchase. If that happens many standard purchase agreement contracts allow you to get your earnest money back. Another way you can get your earnest money returned to you is f you find problems with the property. In your case you found problems with the property and they fixed them so I am not sure how far that argument will go for you. The best thing to do is become familiar with your purchase agreement. You must also consider how much earnest money you want back. Do a cost benefit analysis of your case. Ask yourself, is the amount of my earnest money I may or may not get back worth the investment in time and money it will cost me to litigate the issue? As for the jurisdictional question you have, it depends on where the property is located.

You need to read your contract closely, including the financing addendum that was likely included with your contract. There are tight deadlines to be sure to investigate quickly. Those provisions should address the impact of no loan qualification on the contract and/or deposit.