First of all, there is a difference between a pre-qualification and a pre-approval. Pre-qualification is just based on what you tell the loan officer, pre-approval comes after you have submitted a completed loan application. If you were pre-approved, then yours and your husband's credit reports would have been examined and any problems would have been addressed. I think it is up to your loan officer and real estate agent to point out the differences to you so you know if you can buy or not.

As for accepting the counter, this cannot be done in an email. You would have to sign the counter offer, as would the seller. Until all parties have signed the documents, there is no contract, and the seller can continue looking at offers. It isn't the seller's fault that you didn't have all your ducks in a row before you started making offers. If you had, you would have been under contract already. Why should the seller hold the property for you when it is uncertain that you can buy it?

I don't know what inspections you could have done that would cost thousands. Most home inspections cost a few hundred. At any rate, you should never do inspections until you have a binding contract, because a situation like this might arise. Did your agent advise you to do this? If so, he should also have advised you of the risk.

It sounds like you are not very experienced at real estate transactions. Buying a foreclosure can be complicated, and you either need to educate yourself about the process or rely on an experienced agent who can guide you through it. The good news is that there are lots of them out there, and you will have another chance.

Brett brings up some great points. I'd like to add a few, as I see this situation happen.

With Foreclosures, I have found many REO Agents very skilled at stalls and delays. This isn't an accident. They know they will likely get more offers, the longer they have the home on the market. They stand to lose nothing by doing this, as most buyers will stick around. IF, a listing agent gets an ALL CASH offer, higher offer, etc. they will work to either counter the other offers or accept the highest offer. The Listing agents Fiduciary relationship is to get the BANK the most money. Until all contracts are signed, they will try to get as much money as possible.

Brett's point about getting your Ducks in a row is VERY Spot on! Get an UNDERWRITER level qualification. The quick 5 minute version that is done over the phone isn't worth much.

I see your situation occur fairly regularly when buying foreclosures. It's unfortunate, but one more reason to make sure you have the right Agent representing you, as this looks like this could have been prevented.