'ugly wife/she grew up hot'

I don't think it's a continuity or accidental error. The fact is the 'ugly wife?' joke is quite funny in the context of the scene, and the next scene also wouldn't work without him describing his cousin growing up hot. It could be that Donnie meant that his wife is decent looking, somewhat average, but decidedly not model material and therefore he made that joke. Plus it could be she used to be ugly but grew up being more attractive, which would just justify the next scene.

Either way, knowing Scorsese there is no way it's an error or oversight.

That's what happens with improvising. It's supposed to be a guys joking around about their wives, getting to know each other line. But in the next scene he says he married his cousin because she was super hot, doesn't make a lot of sense.