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IMO this house will be an albatross. If Mom does not legally own it, I would just let it go. Chalk up the rent as such rent. She will never live in it again.
To be on Medicaid Mom can only have so much in assets and there is an income cap. If she gets Social Security disability that will need to go towards her care. There will be no money to pay the rent or upkeep on a house. You need to figure out who actually owns this house. You do not want to put it on the application if the deed is not in her name. She may just have to let the house go. No way she will be able to keep it up if on Medicaid.
I have a feeling that your Mom was in Rehab. No Medicare Advantage or Medicare pays for longterm care in a facility. And they were correct in not paying for further Rehab if Mom could not participate in PT.
Medicaid will take at least 3 months to process an application. You will need 5 years of bankstatements and other info. Talk to her landlord concerning the deed. Mom may not get a deed until she completes their contract. It will be like a house closing? So for now, she is just a renter. She has no house.
Medicaid does not go over State boarders. You will go thru all this now, and have to do it all again. Is there no way someone can care for Mom now? Or get her to Miss. now.
You will simply supply whatever information to them with an attachment, that you supplied to us and you will tell them that she is doing a rent to own agreement, just as you told us.
I am uncertain who helped to fill out her applications, but the answer to "do you own a home" would have been "no" and you would have put in an attachment with a copy of the rent to own agreement.
At the end you will figure all this out, the executor of the remaining estate or the administrator, with a probate attorney. Best of luck to you.