Is it legal that earnest money will be forfeited in case that there are legal reason that buyer can't close on the closing date

I agree with the previous answer, but here is some more detail. The written agreement to buy the property will normally specifically say what happens to the earnest money and under what circumstances you get it back. It will also contain any closing conditions that allow you to terminate the agreement and get the earnest money back. If the documents had been drafted correctly, you would have a closing condition in the agreement where you have no obligation to close (and can get your earnest money back) if your co-signer is not able to sell his house or a more general financing condition to closing (where if you don't have financing, you don't have to close). Check your agreement to see if that is in there.

From your seller's perspective, what the lender says and doesn't say, and whether you get financing or not, is irrelevant without that closing condition or other language in the contract that protects you that situation. So if your agreement to purchase the property is silent about financing as a condition, and the time for exercising any other termination rights under the agreement have expired (under a due diligence period or another closing condition), then you may be out of luck on the earnest money. Many sellers do refund earnest money even if they are not obligated to if they understand a situation, but this is up to the seller's discretion.

Let me know if you want me to review your documentation for advice on what your specific rights in your sitaution are. I cannot help you with pursuing litigation against the seller, as I am a transactional attorney. Check out my website at www.nymanlaw.com.