Can we sell the house without penalization?

First, remember that you need legal authority to sell your mother's home. Even if you will inherit it (as the sole surviving child if there is no will, for example, or under the terms of a will), until you go through the probate process and the court confirms that title passes to you, you cannot sell the home. Until that happens, the home can be sold by "estate" (the legal entity which comes into being when someone passes away, to pay any last or final debts and distribute property/assets to heirs and beneficiaries), under the authority of the executor appointed by the will, or the court-appointed administrator or personal representative (if there is no will). 
Before probate is done and the house is inherited by someone, the estate, can, as stated sell the house, if the executor, etc. determines that doing so is either necessary to pay claims filed against the estate or is in the interest of the heirs or beneficiaries (e.g. if it would be better to sell and distribute the money than to keep paying taxes, mortgage, upkeep, etc.). 
Timing is important. Until probate is completed, creditors of your mother or others who may have a claim against her--like Medicaid--may file claims which would have to be paid from estate assets--including by selling the house and devoting its proceeds to repayment of debts. After probate and the house goes to an heir or beneficiary, if any creditors, etc. did not present claims before then, they no longer can: once the estate is wrapped up and property is owned by others, it's too late to file claims.
During probate, if there is a qualified, interested buyer, you can sell. But if Medicaid comes and seeks money, they'd be entitled to it. So you can sell, but 1) you can't distribute the proceeds until after probate--you need to keep the money in a separate estate account until it is determined whether there are claims that must be paid from it; and 2) you have to sell for "fair market value"--i.e. what the house is worth. If you sell the house for less than market value during probate, when Medicaid could exert a claim if it chose, that may be seen as an attempt to defraud Medicaid and keep money or assets out of its hands; in that case, they could potentially rescind or undo the transaction, force the house to go back to the estate, and then go after it. 
So you can sell it now, but make sure you have authority from the court to do so, sell it for market value, and keep the money for now in an estate account.