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My mother currently lives in a 3 bedroom house, with a yard. She has Dementia and does not do much in recent months accept watch TV and sit on her porch watching the squirrels. She has not prepared for her care and money is very tight for everyone. She cannot afford a 1-bedroom for very long or really at all. Is it reasonable to move her into a 1-bedroom with a bit more space and then downsize afterwards or move her right into a studio and save the money?

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With Dementia won't your mother need caretaking help wherever she lives? Can you hire in home care-taking or are you the only caregiver?

If your mother stays in her home with in-home care you/she will also have hire essential outside help for maintenance.
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She probably loves her home and watching nature in her backyard.
Is there a possibility of exchanging with a home health aide, or a nursing student (or two) - or some other kind and patient person --

(maybe a senior citizen who is in good shape physically and mentally and pleasant ) who likes being mostly at home... And spends most of their time at home.

Letting them live in the house and watch after her while they are going to school or maybe they work remotely on the computer etc. It would give her care and company.

It would help both of them out, plus keep your mom happy in her own home.
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Moves are hard on everyone but especially dementia patients so normally I would say the less upheaval, the fewer moves the better but there are two possible considerations here I noticed. First is do either of your options have a porch or deck where she can go sit outside and watch the squirrels the way she is now? Sounds like while her house may have a lot of space she has already closed her space to a smaller area so if you can keep the things around her that she uses now, her TV, chair and the ability to go sit outside it may help keep the change from feeling so drastic. I don’t know if that includes moving into the bedroom for the night or not, my mom for instance goes out to the kitchen and sometimes sits in the living room but for the most part she lives in her “big room” sleeping on the couch (it’s a battle we stopped fighting a while ago) so a studio space probably would work for her.

The other thing to consider is if mom is moving to AL with dementia, depending on her progression and needs, she may need to move to memory care before too long and that is another move. If you decide on the 1 bedroom she may need MC before you need to move her for financial reasons and skip the extra upheaval. Are all of these, IL, MC, nursing care available at the same facility, same property?
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In my opinion, it would be unwise to move her twice. A studio is affordable so move her straight into one. Moving is hard on old people especially ones who have dementia, and should only be done once, if at all possible. Arrange her furniture properly so as to optimize the space. Put her most cherished possessions on display. She will get used to the studio and may even grow to love it. Done well, studios are cozy.
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For me your post was confusing. I guess Moms house is too much for her so your considering downsizing to an apartment. Seems the problem may be her monthly income? This is how I look at it. You sell her house and it has to be done at Market Value if she ever needs Medicaid. You then use her SS or/and pension to offset the cost of an apartment and use the proceeds of her house for utilities and food.

What you need to realize is Mom has Dementia. As such, she may not be able to live on her own. In my opinion an Assist Living would be a good choice but its private pay. Medicaid does not usually pay for AL or Memory Care. It pays for NH care which ur Mom may not be ready for.
As said, Dementia people get confused and like familiar surroundings. Its not wise to bounce them around from place to place.
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Don't be frightened by people telling you that you must sell her house at fair market value to protect a future Medicaid application. It's not complicated as long as the sale is an arms-length transaction, which means that no family or friends get to buy the house on the cheap. Fair market value is simply the best price your mom gets for her house on the open market. Your best bet is to hire a realtor who is knowledgeable about her neighborhood.
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