What should we do about this house?

ok so me and my husband had been looking at this house for over a year..it was being sold by owner a very nice elderly woman that had not lived there in at least 5 years or so..started out her wanting 40k..well after a year she has dropped it to 25k it does need some fixing up..anyways..after finally saving enough for the 20% down we needed we went to the bank everything checked out great we went to her lawyer paid earnest money..then it got appraised..and it appraised for way less than it should of..now like i said it does need some work..but the appraiser said the garage needed to be demolished (which it does) it needed all new windows and siding..(in the long run we planned on fixing that anyways) well now the bank will not loan us the money...they said the best they could do is loan us part and we have to come up with 8000 more dollars..well we cant do that..anyways i am sorry i am making this incredibly long...her lawyer suggested her selling it to us privately..as in rent to own basically..it would be just like us living there but not paying a bank the monthly mortgage payment...we would pay her..we are meeting with her lawyer wednesday to go over everything and basically its up to us on what to do next..so im just looking for opinions on what we should do..we really do love the house and even though it is a bit run down we are looking at the bigger picture..so what should we do?..what would you do?..thank you to anyone who takes the time to read this...: )