Is It Better to Sell My Mom's House or Have It Go into Foreclosure?

While it's impossible to say for sure, I don’t think you would have a problem with either approach. Both ways of proceeding can be defended to the state Medicaid agency as a rational economic decision. The route that could get the most money out of the house would be the best if that can be determined. That said, I’m not sure why your sister would be concerned about your mother’s credit rating. I assume she is not going to go out and buy another house or car at this point in her life.