You’re right that if he’s still talking about it, he isn’t over it. At the very least, he’s holding onto it tightly as part of his story. It sounds to me like he has some issues that he needs to deal with and should probably have some counseling to help him figure out why he can’t let go of the things that happened and what might be causing his blockages.

I also wouldn’t like the living situation if I were you. I had a couple friends who tried to do that while dating other people and it just did not work out well at all and they ended up worse off because of it, basically hating each other. With his kids being only 5 and 10 years old, there is a LONG time to live together before the kids become adults (and separating when the kids are “older” like as teenagers isn’t any better). Are they planning to live together this whole time? I’m not sure that’s a healthy situation for the kids either, and it’s definitely not conducive to either one of them dating, especially if the people they’re dating ever get introduced to the kids. To me, it seems like it would be healthier for everyone to separate, as that’s sort of a weird example to set for the kids too unless they both commit to not dating anyone else while they’re living together… which would leave you out.

If this is his plan that he is bound to stick with and if I were you, I’d probably heed the red flags and back out before you get too attached.