The home isn't foreclosed or anything, it's owner occupied, just a normal listing.

I'm 22 years old and have a normal boring job.

Building materials as you point out costs basically the same at Home Depot and Lowes, regardless of the real estate market in that area.Around here you get 50 miles away from the center city and you're beyond the normal commuting area. 

They earn 3x+ in income, no felonies, no evictions.The credit score would normally mean I would deny the application, however the cause is due in large due to a divorce, in which they were still on the mortgage.

Normally title work begins when the Buyer's agent receives an email back from HUD showing acceptance of the contract and EMD.

They stop paying their loan, property gets foreclosed, and we end up still having a separate agreement where we owe them money.Are any of these things normal and I'm just overreacting? 

#1 covers what could be a normal market in your area, or things out of your control - a bad recession, neighborhood disruption (construction, crime spree, etc) - without any money out of your pocket. #2 covers a catastrophic issue in or out of your control that makes the entire structure uninhabited/uninhabitable for at least a year. 

Once you receive an approved building permit, and at the last minute decide you want to extend the porch a foot out, or add a covered deck, what would the typical process to do so be?

My biggest question is if there should be some sort of fee for essentially doing the foot work, finding the property and going through all the steps given the down payment is being paid back.

I believe Lending Home does gap financing which basically can bridge the difference between the money you need and what they would lend under normal circumstances e.g. 75% ARV