Cancelling A Purchase Agreement?

Minnesota: We signed to purchase a house contingent on approved financing. Our financing was subsequently approved by the bank. We then lost the buyer of our current home and also found out we have to replace our septic in ten days (results of an inspection - failed) to the tune of about $10,000. Between these two factors, there is no way we can gather up the necessary down payment, nor even make the monthly payments on both houses. The sellers say we have a binding contract as our loan was originally approved. Because of this, they want $4000 beyond the $1000 good faith money we put down. Is our inability to make the loan work in spite of having been approved initially a defense? We have offered the sellers the $1000 for their troubles ($120,000 house) but they insist on the full $5000. What are our options? Thank you. Doyle

[HomeGuru]

Read your contract. There should be a contingency on the downpayment. If not then someone messed up.

It reads as follows: This agreement is contingent upon the following financing contingency. If buyer cannot secure a commitment for such morgatge this agreement shall become null and void and the earnest money paid by buyer shall be returned....
The agreement was NOT contingent upon the sale of our house but advice to us was that if we can't obtain financing, the deal would be off. Essentially, we were preapproved by the bank for the loan but are unable to make the down payment so we cannot obtain the loan. Are we liable for the full $5000? Thank you again! Doyle

[HomeGuru]

That was not the applicable section that I was referring to.
Nonetheless, your contract was not written correctly if there was no contingency for the sale of your home.
I have a mean feeling your Realtor screwed up.