It sounds a good offer to me - she obviously thinks highly of your research, and if she does get funding, I would imagine that negotiating working from home would depend on the project requirements. Personally that would be my ideal outcome after completion, depending on the project it was linked to, as I want to stay within my current institution. Congratulations on getting your first year report out of the way btw, it must have been a good one if that was the outcome! Why don't you just keep her suggestion in mind for now, as it's early days yet in your PhD - your research might take you in a different direction as you progress, or you might get a more interesting offer as you meet more people along the way.