First of all you have to find out what you are qualifed to purchase. The only way that you can find that out is by going to a "Mortgage Broker" to find out what you are qualified for and how much. There are some lenders taking credit scores below 400 now.
In answer to your question off the bat is about the interest rate, yes it is a bit high, but you can blame that on how you have taken care of your credit.
Now as I see it and after reading your question the primary objective is to get you and your fiance into a house. That being the primary goal let's go about getting to that goal.
A nice house is what everyone want. You are young enough to be what is condsidered in the real estate business as a serial buyer. Let's see if we can lay out a program that will get you what you want.
First of all contact a "Mortgage Broker" to get pre-approved for a property. You will need to have a months worth of pay stubs, W-2 from each of you for 2 years, Fed income taxes from each of you for 2 years. Any bank statements savings and checking for the past 6 months (Others might be needed later) cancelled checks proving you have made you rent on time each month for the last 12 months.
Get this information together and call the mortgage broker, he will or might need additional information, find what he needs and get it to him as fast as you can.
Once he has collected all the information he needs, he will then fill out a loan application, get a credit check for the both of you which will give him your credit score. This credit score will tell him the loan programs you are available for. Your income, baased on your pay stubs and fed income taxes as well as the debts listed on your credit report will determine the amount of house you will be qualified to purchase ( In other words how much the lender will lend you for your purchase.)
Once the mortgage broker has issued you a pre-approval letter find a real estate agent that will assist you in finding a property for you and your finace. Your mortgage broker might have a referral for a real estate agent that you might use.
Now the program, once you have been pre-approved by this mortgage broker consider the purchase of a 4 unit apartment. This will give you 3 others to assist you in paying the mortgage that you will incur.
Answer to your question, yes there are problems with having units and renting them to others, and there is a learning curve, be quick about it and learn how to select the correct tenants as well as how to evict those bird brains that will cause you problems. There are several books on landlording, buy one or two and get the knowledge you need to be successful in what you want to do.
Keep in mind that any interest rate you pay whether a low rate or a high rate is tax deductable, if you purchase units as indicated you can also deduct appreciation on the actual rentals that you rent out. (See your tax preparer or CPA for any tax advice)
Also make the mortgage payments on time, if you have an high interest rate or a 2-3 year loan that turns to an adjustable you may refinance after your pre-payment penalty is over to a lower rate. This will reduce your monthly payments.
As soon as your rent has gotten to the point where you can pay it with the rents you receive, then you should consider moving to another 4 units. By this time you will have lots of experience in landlording.
You may do this as many times as you want until you really want to purchase that dream house in that dream community and have your children.
This will increase your net worth as well as eventually give you an income if you keep the properties and allow the to appreciate in value and not refinance them for cash out for some reason.
This is a simple plan, don't let the interest rate scare you, don't let friends talk you out of what your goal is by telling you negative things about renters (They are all true).
You must make up your mind about buying a property now. When I say that I want you to understand you must check the numbers on buying units. So check out how much your monthly mortgage payments will be, how much your monthly or semi annual property taxes are as well as your insurance will be for the year.
If you are making a profit put emergency funds in the bank so when your first water pipe burst you will have funds to repair it or what eveer you will have problems with that need reparing.
Last but not least leave grandma out of the mix. I have seen so many folks with great ideas get ma and pa or grandparents to co-sign for a car or a house. When things don't go as well as planned they up and get the hell out of Dodge leaving ma and pa or the grand parents holding the bag. She should be living her life in relative peace not concerned with paying a mortgage and recieving telephone calls from the mortgage company asking when she is gonna make the payments and we are going after your social security or other income she has saved up for. Do it on your own with your own credit no matter the condition. Don't make your grandmother pay for a possible mistake that might be made. You made your bed good or bad, leave grandma to her peace and quiet.
I hope this has been of some use to you, good luck.