You have encountered a common problem... repairs. Any lender can allow for an escrow-holdback for repairs, however even if allowable the decision is always at the underwriter's discretion and depends on the type of financing you are obtaining. In general, when a significant down-payment is not being made (and so the loan is a higher risk to the lender) there will be less flexibility. Because you mention a water heater, I assume you are making little or no down-payment and need FHA insurance to qualify for financing.
If that is the case, because of the 'kitchen' item you mention and the $5k cost "ESTIMATE"... it is likely your loan will need to be insured under the FHA section 203(k) rehab program. This will raise your interest rate and add additional financing costs, but because the home is in disrepair and financing options are limited you should already be getting a tremendous deal and saving far more than the additional cost... if not, then it's time to renegotiate the price.
203(k) - How It Is Different:
Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made.
When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203(k) program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.
BUT, If you don't want to deal with even more government bureaucracy and if you want to avoid the FHA then there are also Private (non-government) financing options that can resolve the problems. Those details will depend on the specifics of your situation.
Call Integra Mortgage @ 407-331-7736 x3216
Palm Springs Realty (Commercial & Residential)
U.S. Housing and Urban Development Approved Broker
Licensed Real Estate Broker, Mortgage Banker, CPA (inact.)