So your dp owns the 2 bed house, undergoing renovations, with the option of an attic extension, and pp possible for a 2 roomed extension. Are you currently living in the rental while renovations are underway? Is dp's 2 bed in a state that is livable for him and his dn?
In dp's currently blinkered and over-optimistic view, would dn go to school (or is that not possible?), or would you be expected to look after your own newborn, and dn all day? and support home-schooling? I assume that your own dc are at school.
I think it is clear that dn cannot move into your current rental home, and I think it would be best if your dp and his dn moved into the 2 bed owned property. If it's not currently habitable then it may be that a period of foster care would be required for dn anyway.
When your current rental comes to end, could you get a new place closer to dp's house (accept this would mean your dc moving school, but that was the plan anyway)? That would allow dp and dn to establish their living arrangements in a more settled environment, and for new baby to be born into a different settled enviornment.
Over time, and as planning permission and extension work are completed you could take a planned approach to the possibility of having a more integrated family. This way dp could see the reality of long term care for dn; dn's behaviour (with skilled professional support) may improve and be more manageable; you and dp could work towards something, and maybe have a positive experience of co-parenting the new baby. In any case, I think your current plans for marriage have to be shelved.
Or are you thinking that dn's behaviour and situation is so awful that you can never safely have a more integrated family?
Really sorry you are all facing it. It's a no-win set of choices 