Currently, the tax credit cannot be used as a downpayment. The credit, granted with a tax return in 2009 for the 2008 tax year, will be given to any qualifying first time homebuyer (no home in past 3 years) up to 10% of the purchase price, or max of $7500. In subsequent years you are required to pay a percentage back in taxes. It basically amounts to an interest free loan, except, if you sell the home several years after purchase, and if there is not enough money to pay off the $7500, the credit due back is forgiven. (Not sure that was a good idea.)
What I am hoping people do is buy structurally sound homes and use the credit money to update them cosmetically, increasing their value significantly. Another good idea is buying a home and then paying down the principal to reduce of eliminate PMI. OR...banking the money, drawing a wee bit of interest, and knowing you have it there to supplement payments in the event of an emergency. Those are all good ways to utilize the credit. Unfortunately, it does not take a rocket scientist to figure out you can abuse the credit. There is no limitations on what you use the money for.
There is talk of changing the credit eligibility to any principal residence buyer, and they are looking for ways to use this money for upfront costs. There could be changes by early next year. Right now, the credit is due to expire on 7/1/09, meaning you must have a purchase by 6/30/2009.