The general answer to your question is yes, you can buy a home with only $3,500 down. With an FHA program, that would limit you to a $100,000 home with seller-paid closing costs. If you found a HUD home (an FHA foreclosure), you can buy those with only $100 down, but you will need to bring in the closing costs.
However, did you know that you could buy that same home with ZERO down, be free of any mortgage insurance payments (none!) and have the seller pay your closing costs? The bonus is you get to keep your $3,500 for your â€œRainy Dayâ€ fund.
If you'd like, you could increase the loan amount up to the maximum your debt-to-income ratio will support so you can buy the home you want, not the one you may feel you have to settle for.
In regards to using the $8,000 First Time Home Buyer tax credit for your down payment, Washington has rescinded the Mortgagee letter 2009-15v that HUD had passed to allow this. Even if it did pass, there are systems that would need to be in place to access the $8,000 & this will take time to implement...keep in mind that this $8,000 First Time Home Buyer tax credit expires November 30, 2009, so you must close, fund and record your purchase by this deadline.
All the best,
Roswell Moore, CMPS
Certified Mortgage Planner
(480) 422-5095 Direct