Purchase of Home and denail of mortgage just before closing.?

I suggest you obtain an attorney to advise you in this matter. Each state is different and the laws. You may want to walk away and you with legal matters such as these, it could take considerable time to work them out. As for the seller, they should have know and disclosed I would think before accepting your offer. Lender has every right to deny a loan on property for that reason. But to protect yourself, I would hire an attorney.