My son did not received the approval for mortgage. The real…

Who wrote the contract to purchase? Was there not a clause in the agreement that the sale was "subject to financing"?

Did your son have a lawyer working for him on the transfer?

There may be a fact or two missing here. If the contract has a subject to clause then the contract ends unless the person with the condition removes it. A purchaser would not normally remove the subject to unless they knew they had secured financing. Once the subject is removed, it becomes a binding agreement. If not removed, then the seller has no contract.

If there is a valid agreement, then the vendor usually can keep the deposit as damages. Yes, it is possible to sue a defaulting purchaser for any reduction in price after a valid enforceable agreement. Is it possible your son removed his protection before he had financing??

On your facts, they cannot unless your son removed the clause that protected him before he received a bank commitment for a mortgage. If he made that choice and made the agreement to purchase final, then the vendor can keep the deposit and if the vendor HAS TO sell the house at a cheaper price, your son could get sued. If he never removed that condition then there is no contract and he should be able to walk away and get his $5000 back as well. My concern is that his lawyer is suggesting he leave the $5000 for the vendor. That lawyer may know something we do not. The lawyer may think your son is bound by the contract and that this could be a prudent settlement. But, if your son did not remove the financing condition, the lawyer should be demanding the $5000 back.

The latter point of whether a purchaser has to pay the difference in price depends on how the market truly is. The vendor cannot just sell at a lower price and go after the purchaser. The vendor would have to prove that they had no choice.