Assuming that this deal is pursuant to a "standard" NJ Realtor's contract (residential) and you have an attorney, there probably is no liquidated damages clause, (which NJ courts are loathe to enforce in a residential setting). But, since there is a dispute as to whether or not you are entitled to terminate the contract, the deposit would stay in escrow pending: A) outcome of any lawsuit by the seller for damages, e.g., because of your refusal to move forward, the seller sells to someone else for less money and had to carry the house for a longer period of time; or, B) because of your refusal to move forward, the seller sells to someone else for less money or the same or more money and authorizes the release of the deposit; C) you file suit for return of the deposit and win (of course the expense probably will be more than the deposit).
If your contract is contingent upon you obtaining a mortgage and your mortgager application is still pending, you might want to advise the mortgage lender of the $35,000 change in your financial condition as this is the truth. This might result in the denial of your loan (has to be in writing), and thus, the contingency will not be satisfied and the contract will terminate that way, entitling you to the return of your deposit.
As always, as you are represented by counsel, he/she knows best what can be done and what cannot be done ( inadvertently, you may not be supplying all the pertinent facts) and you probably are best served to follow your lawyer's counsel.
From the facts you presented, you should hope that your Contract has a liquidated damages clause which would limit your exposure to losing only the $5,000 downpayment, because based on your own facts, I would opine that you could be looking at much worse. Giving someone a personal loan and then purporting to no longer qualify for a mortgage will not work, rest assured, irrespective of the reason why you had given the loan.
I know you didn't like the previous answers when you posted this same question a few days ago, I guess you're hoping for someone to tell you what you want to hear.
Good luck with that.
My answer is for general purposes only and is not not intended to establish an attorney-client relationship, nor is it advice upon which you should act or rely. But, if you really want me to tell you something upon which you can actually rely: don't eat yellow snow.
I agree with the previous answers and would add yes you may be liable for the other party's attorney fees if you go to court.
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