Converting a basement to living space can be done, but its not going to be easy. If flooding has occurred in the past, it can happen again. You probably won't be covered for losses unless your fiance's brother has federal flood insurance. The first issue you MUST deal with to make this an occupied space is there must be more than one means of egress. This is for your safety in the event of fire. At a minimum, a dry-well would have to be constructed to provide outside emergency access in addition to any interior entrance. This can be a difficult project and may be the most costly modification.
Once that "code" problem is solved, the musty smell can be eliminated by washing all surfaces with a disinfecting cleaner. You should also invest in a de-humidifier, preferably one that vents to the outside. All masonry should be painted with a waterproofing paint like dryloc. At that point interior walls can be constructed (including electrical outlets) insulated, vapor barrier applied and drywall installed. Finally the floors can be covered. I recommend you consider impervious materials like ceramic tile and throw rugs, or carpets that can be lifted in an emergency and removed to the upstairs.
I'm not sure this is either your most economical or most comfortable way to start out. You will be improving someone elses property at your cost (which could be considerable). There is also a high degree of risk that the basement could flood with a loss of everything you have done. And finally don't even consider this without ensuring you have adequate safe access and ventilation.
I'm not sure that I agree with big bob regarding romance fading, but living in a basement that is not done 100% right could put a damper on things in a hurry. Good luck.