What happens next when the house did not pass inspections and subsequently the bank will not loan to us? We still want the house badly.. can the seller drop the price to get approved or can the seller make improvements and try again?
Depending on the severity and nature of the inadequacies, you may have several options available to you:
You could negotiate with the seller and have them complete the repairs that your lender is requiring to provide you with financing. The lender/broker that you are dealing with would be able to provide you with a list of required repairs. Once they are complete and have been inspected, you should be able to complete your transaction. Your real estate agent would be able to help with the negotiations between you and the seller.
If the repairs are relatively inexpensive (usually $5K or less), some lenders would be willing to put money in escrow and have the repairs completed by you soon after closing. Again, your lender/broker would be able to inform you as to the availability of this option.
You could apply for a different form of financing (such as a construction loan) that would allow you to purchase the property and finish the needed repairs. Once complete, you may be required to refinance out of the temporary financing.
The riskiest and least appealing option would be for you to pay for the required repairs and have them completed before closing on this home. This would require seller approval and you would run the risk of paying for the repairs and never completing the purchase, thus losing the money you paid for the repairs.