Helps needed on my loan denial case

I'm on a contract to buy a $234,900 house. Before the seller signed the contract, I provided a pre-approval letter which is obtained three month ago with sales price of $280,000 and loan amount $260,000. This pre-approval letter is based on the committment of my wife that she is willing to pay $20,000 down payment for the house purchase (but this detail is not put on the pre-approval letter and the seller is not aware of this, and my wife's name is not on the contract). Due to some family reason, my wife faxed another document to my lender and stated she would NOT pay any money for my house purchase. So my lender faxed me a loan denial letter and said I was denied because I could not provide document to support the 5% down payment requirement for the loan I am applying. On our contact, there is one 'CONDITIONS' -- buyer must be able to obtain a conventional 90%LTV for a term of 30 years. So my agent help me signed the termination and faxed it to seller agent.

Seller agent responded that (I collecting some words in his email)
1. they think this action a "Breach of Contract".
2. the loan denial letter you sent simply states the lender can not verify the source of the down payment" (not that buyer did not have the down payment).
3. it is irrelevant as to if the buyer does not now have the required down payment. He stated he did on the contract. Clearly, based on the original approval letter Mr. XXX¡¯s credit and income will allow him to procure a loan.
4. Sellers understand to do otherwise is a "Breach of Contract" and they may litigate this contract for "Specific Performance" plus damages in District court.
5. If buyer truly wants out of this contract, Sellers are willing to release him but retain Buyers Ernest money of $2,500.00.
6. Please also be advised this will not be a "Small Claims Court" action for the following reasons:
If the sellers are forced to litigate it will be for "Specific Performance" of the contract plus damages (not just the Ernest money). Small Claims Court only handles cases up to $5,000.00.
The sellers to not reside in Durham County. They reside on the West Coast of the U.S. Any "Small" claim brought by the buyer would have to be heard in the defendant¡¯s (seller¡¯s) district.


I offered him my copy of recent 3-month back statements or call my lender if he has any questions or concers about the denial letter. But he has no response at all since his last email. I try to communicate with him, but he doesn't response me at all.

So my questions are
1. What should I do next? Just sit here and wait?
2. on the above third response from seller agent, 'He stated he did on the contract'. I went through the contract. I'm sure there is no such kind of statements like 'I have 10% down payment'. the seller agent also asked us to use lender in his company. But the rate is very high and I still don't have 10% down payment, so I have to apply for 100% loan. I am not confortable with that at all. My agent told me I didn't have to use lender in his company. Is my agent right?
3. what does "Specific Performance" really means? I have to buy that house even if I'm not qualifed for a 90%LTV loan?
4. If I go to "Small Claims Court" to ask for the earnest money, I should go to the court in the location of the property or the location of defendent? I'm at NC.

Thanks a lot! I am really depressed.