When the property is held by a written lease containing a clause declaring the lease forfeited for the nonpayment of rent for a specified time, no process shall issue against the lessee or other person occupying the premises, until the expiration of said specified time."

Condition of forfeiture; right to cure A purchaser's right to exercise an option to purchase property under an option contract cannot be forfeited unless a breach has occurred in one...

Your contract terms still dictate when you would forfeit this, and your inability to obtain the financing in time would likely mean you get it back.  

Did he forfeit his commission on the front end(Meaning put $0 under selling agent) or is he collecting and then contributing to the project ? 

The option deposit and any subsequent money that was going to be applied to the purchase price is also forfeited to you.

Seller agrees to apply $500/mo towards a reduction in the final purchase price"This was quite generous, since the going rent rate is easily $1600/mo in my area.So, if you don't buy, there is no price to reduce, but I guess it should have stated that it was forfeited altogether.  

Just want to make sure if she doesn't receive funding for the  mortgage she forfeits the 40,000.

Here it would be a notice of intent to forfeit.

Some purchase and sales agreements (Lease Purchase) may have specific performance requirements that allows litigation is the buyer doesn't buy, but I don't really recommend adding insult to injury if a buyer doesn't close in a lease purchase by them forfeiting their earnest money AND staring down the barrel of a lawsuit for not buying.

Needless to say, as soon as you sign this agreement, you are locked in and have to buy the property or forfeit your 5% deposit.