Is the money that the mother gave to her son to buy a house for her younger brother—then the mother died before the purchase—returned to the heirs for division, or does it remain a bequest for buying the house, especially since the mother said before her death that it was merely a loan?

The money held by your elder brother falls into two categories:

First: If it was a loan, it must be returned to the estate unless all heirs waive their right to it, provided they are legally competent to do so.

Second: If the amount was entrusted by the mother to the elder brother to purchase an apartment for the younger brother, this also reverts to the estate due to the purchase not being completed. This is because any gifted money that was not taken possession of before the death of the giver returns to the estate, as reported by Aisha (may Allah be pleased with her) and as mentioned by Ibn Qudamah.

As for it being a will (وصية), it is not valid, as the mother did not bequeath it before her death. Even if she had bequeathed it, a bequest to an heir is not permissible, based on the Prophet (peace be upon him) saying: "Indeed, Allah has given every rightful person his right, so there is no bequest for an heir."

In summary: The money must be returned to the estate in all circumstances, unless the mature and competent heirs agree otherwise.