I recommend that you ask what works for your family member. Some people prefer a lump sum of cash, while others would like to receive a monthly income. Perhaps she’d like both, where you offer a down payment and make monthly payments. Additionally, as you mentioned, you are willing to add value with your labor. Hard money would make this onerous to you, similar to making payments on a high balance credit card.
In this situation I have presented three offers to my sellers, and I educate the benefits of each one to the seller.
-A lease option is fairly close to what you have been doing already...renting with an option to own. She keeps the deed until you satisfy the requirements that the two of you set out in advance.
-A full price, conventional offer is where you would qualify for and complete a mortgage application and the associated inspections. You don’t appear to qualify for a large enough mortgage at this time. I’d work on my credit and ability to qualify for a larger mortgage, with intent to refinance in the future.
-Seller finance. She might receive a down payment, transfer the deed, and collect payments at a specified interest rate until the house is paid off. You pay for taxes and insurance through your own accounts. When I have used seller finance, the title company sets up escrow to collect my payments and distribute them to the seller.
She’s already willing to be “creative” so I’d ride that horse off into the sunset.