You're not the bad guy. There is a limit to how much criticism a human being can take.

She is rude and thoughtless. Would she like people to comment on her physical appearance or would she then feel persecuted? This is what insecure people do. In her mind: she is golden, her son is golden and the whole world is subpar. That says a lot about her.

Great that you decided to limit contact with her and that you put your foot down re her staying with you. Your husband is unhappy? Well, what solution is he offering then? It is not acceptable that his mother keeps disrespecting you. Why should you be bullied in your own home by this womanl?! This is setting good boundaries.