FHA allowing use of First Time Homebuyer Tax Credit for Purchasing- sort of

Many have heard about the rumor that HUD and FHA will allow the use of the First Time Homebuyer tax credit for purchasing a new home.  Well- yes and no.  The new rules have been released and they are as follows:

Borrowers MUST have their 3.5% into the transaction, the tax credit can NOT be used for the down payment.  The borrower may use the tax credit for closing costs, buying down the mortgage rate or additional down payment. 

The tax credit is “purchased” by an entity or individual for no more than 2.5% of the actual credit so for example, the borrower is allowed the full 8000 credit, they will actually benefit 7800. That is a positive as those looking at purchasing this prior to HUD’s ruling were charging a killing for this!  This person or entity can NOT be someone involved in the transaction.

We must document that the borrower has no other IRS obligation that will reduce their ability to receive the tax credit. We must complete IRS 5405 to determine this.

So- Good news, bad news, borrowers will still need 3.5% down, but now maybe won’t need so much in seller credit?