Legal Question in Real Estate Law in California

It is important to know whether the debt on the property is purchase money debt. That is a loan placed at the time of purchasing the house and used entirely for that transaction (as opposed to using part to pay down other debt to qualify, for example). If it is puchase money debt, there is no recourse against personal assets. If not, things get a little more complicated. If the debt is a refinance, or otherwise is not a pure purchase money loan, then short sales can be dicey. The lender in that case is not obligated to charge off the remaining balance. Some lenders, including BofA are expressly refusing to agree in their short sale agreements not to pursue the balance owed. They are just agreeing to release the lein in exchange for the short sale payment. Whereas if they conduct a trustee's sale (what is commonly called "foreclosure") they are again barred from pursuing you for any shortfall. However, if they get wind that you have assets to pay the debt, they may conduct a genuine foreclosure which involves filing a lawsuit on the debt and an order for foreclosure and sale of the property. If they go that route (very rare in residential cases but not impossible) then again they can recover the deficiency.

So, if it is a purchase money loan you really have nothing to worry about as far as the inheritance. If it is not, you probably should get some legal guidance to look over the loan documents and advise you on dealing with the lender. Don't go to one of these bogus attorneys who want to take over your negotiations with the lender. You don't need that and the majority of them are frauds. But you should have someone advising you as you deal with it your self.