Q. I want to purchase a home for $130,000, but I need $20,000 to remodel. How does that work?

A. There are two programs you can use that combine a first mortgage to purchase with a rehab loan.

A Federal Housing Administration (FHA) loan would be just right for your purchase and remodeling project.

The FHA offers a 203(k) loan that provides funds for the purchase and rehabilitation of a home. You get one mortgage based on the value of the home when the work is complete. The major advantage of this loan is that you get money for the work at the same low rate as the first mortgage, not at a higher second-mortgage rate.

You're going to have to get estimates, and there likely will be a lot of paperwork, but this type of loan is worth the effort.

The FHA currently requires only 3.5% down, which in your case would be $5,250, and that money can be a gift from friends, family or perhaps a state or community agency. It is a program worth looking into.

Check out FHA 203K loans and see if this loan would work for you.

Fannie Mae, one of the two big government-owned companies that provide banks and mortgage companies with money for home loans, has a similar program to consider. Fannie Mae's HomeStyle Loan is comparable to the FHA program, but offers more liberal terms with regard to how you use the money.

The main difference in the programs is that a HomeStyle loan usually requires 5% down, and it has to be your own money (no gifts or personal loans allowed).

Either way you decide to go, mortgage lenders should be familiar with these programs.