My husband and I have considered approaching my grandma and inquiring about purchasing her house. We would like to have an arrangement in order before she passes so the in-laws do not give us a hard time, but we're not even sure if this is legal. We currently own a house, and she would continue living in it until she passes. We would be willing to start making payments now and then get a mortgage upon her death to settle the estate, but we're not sure if this is possible or how it may affect her if she goes into a nursing home. Can anyone shed some light on this subject?

I am not a lawyer but we have looked into these kinds of issues for ourselves including consultations with elder care attorneys in two states. And many of the rules vary from state to state so I'll just tell you what we were told.
Medicaid helps with Nursing Home expenses if a person's assets fall below a certain level (I have heard maybe avg. of $ 2,000 but varies state to state). Medicaid also "looks back" I believe
5 years now to determine if the older person gave assets away during that time.
The example we were given was that if they find that assets were given away (I realize that you want to purchase the house for let's say $ 100k) and that the monthly cost of the Nursing Home is $ 5,000 per month, they would penalize the person ( 100k divided by 5k) for 20 months of care. In other words, the senior citizen would have to fund the first 20 months on their own without help from Medicare. That's the extreme case. I believe in the case of your purchase they would look at what the fair market value of the house was compared to what you paid Grandma for it. If the purchase was reasonable I don't think there is a problem about giveaway.
But now, Grandma has $ 100k and if she has to go to a Nursing Home, she will have to pay most of it to the Nursing Home but if she had the house it would be protected for a certain period depending on her condition and wheter or not there was a reasonable expectaion that she could recover enough to return to her home. You and she should consult an elder care attorney before taking any action, for sure.

It seems to me that it would be better to purchase the home at least 5 years before she needs to go to a home. Maybe if you purchased the home she could stay there with you and not need to go to a home at all.

Yes you can purchase the home and give grandma a Life Estate, which means she gets to live in the house as long as she can. You DO have to purchase the house at market value. So you should do it now.

You need to purchase the home, now, and get the loan now.