Our Bank wants my husbands parents to be co-signers on the mortgage and to be on the title as well, but only 1% of the title.
What does that mean for them? For Us?
They are both retired.
Will this affect their taxes? Will it affect their pensions?

It will effect in that you can not sell the house without their permission latter. So if some family issue comes up 10 years from now, then they will have to sign before any sale or any re-fi can be done. If they are merely co-signers, the property can be sold ( the loan would be paid) before deed is transferred but their permission would not be needed.

Also if for some reason they had debts that went into a judgement, a lien could be placed on property from their debts.

Personally if you can't get the loan yet on your credit, you need to workon improving your credit and wait for the house.