Seller wont release EMD and is threatening to sue me

[Shane Pico]

Hello all and thank you for any help!

I attempted to buy my first STR and it hasn't gone perfectly... But at least I've learned a lot so far! I am now at a place where it feels like I need a lawyer or at least some legal advice. Here's the run down:

Price: $550,000 - I signed an appraisal waiver - 1st appraisal: $425,000 - 2nd appraisal: $475,000 - my lender wrote a decline letter stating they wouldn't fund the loan (part of the loan required I had a certain amount of reserves in the bank and if a covered the difference I wouldn't have enough which is why they wouldn't fund)  - I sent over the decline letter and signed the cancelation of escrow and release of funds letter - a week later the seller offered to carry the loan with very poor terms - the seller is now trying to keep my emd ($16,500) - they are also threatening to sue me for incurred losses if I don't give it to them - they are claiming that because they offered to carry the loan, that I backed out of the purchase in bad faith and had no intent in purchasing. The simple truth is that the lender refused to fund the loan and I did not sign a loan contingency waiver. I even offered to give them $1,500 as a peace offering to get this wrapped up quicker. Yet here I am! lol

These are just the basics to the whole dilemma, I believe they have no legal right to any of my money, but before i go down this road I would love to have any bit of advice this community has to offer. I am still pretty new to this world so this can potentially be a huge set back for me if I don't handle it properly.

Thank you for everything BiggerPockets Fam!