Is this normal for the 2.7 sludge (blown engine) problem or could it be just a head gasket? Maybe even something else.

Sorry it is a 2001 intrepid 2.7

Seeing that you are frm Mn. I would like to ask what kind of driving the car does. Short drives and not getting warmed up long enough to evaporate out the condensation and this going on repeatedly will cause a build up of water in the oil and in turn very sludgy or foamy oil. If you aren't loosing coolant or if the water in the oil is not the color of the coolant after it has had a chance to settle out some what it isn't a head gasket.
I recommend changing the oil and filter and doing so more frequently.
PS: what do you mean by blown engine problem?

Can you describe what quantity of water is in the oil? If it's a small amount, I'd say condensation too.
These engines have an internal water pump, there is a weep hole located just underneath the thermostat housing. Coolant is supposed to leak out if the pump goes bad.

It was my sister in laws car I picked it up cause they were going to scrape it. It has 97,000 miles on it and was driven mostly back and forth to work about 12 miles round trip. The car is leaking some antifreeze and has lots in the pan.
It will start but that is as far as we have gotten. They were told the motor was blown by someone however nothing has been taken apart to prove it. I have heard the 2.7 is bad motor and was wondering if it is normal when they go bad to have antifreeze in the oil? Basically wondering where to start to determine if it needs a different motor or not. The car is in good shape to nice really to scrape.

2.7 water pump is a dumb design, they can and do dump coolant into the oil when the pump starts to leak. Junkyards are full of Concords and Intrepids that did the exact same thing, doesnt take long for them to turn into a sludge monster and blow the motor.

2.7 heads & head gaskets are noted for leaking too.

Maybe it is a head gasket....there is probably 2 galloons of antifreeze in there. It is way above the dipstick

If it's definately coolant in there, it does not take long for internal parts to wear, so you would be lucky to get away with just head gaskets. Those are nice running engines, but still losers. They cannot be patched together cheaply.

Even if it's "just a head gasket", you'll have a lot of money and time in the repair. The front of the engine will have to be disassembled to remove the timing chains. It's a complicated setup that will drive you crazy. At least it's in an Intrepid where the engine sits north/south, its worse on a Stratus because the engine sits sideways.
If the engine is too far gone, another alternative is to find a 3.2 V6 and do the swap.