If I was in process of a short sale when I received an inheritance, what happens now?

1) Make up the past due amount on the mortgage unless you want to take the risk of foreclosure, as well as the risk of damage to your credit rating (a default on a mortgage being reported) and possibly being sued by the lender for any deficiency judgment (e.g. if you owe $163k and the house is sold, after foreclosure, for $110k, the lender may be able to sue you for the remaining $53k).

2) The realtor, btw, was wrong to advise you to simply stop paying--again, stopping paying puts you at legal risk, since you are in breach of your loan agreement.

3) A short sale or a modification are both completely voluntary on the part of lenders--there is no legal right to do them for borrowers, and no legal obligation on lenders to allow them or work with borrowers. Lenders may insist on payment in full. Your realtor is right in that if you have at least $200k and owe $163k, a lender will almost certainly NOT allow you to do a short sale or let you modify your loan. Afte all, why should they--you have the money to honor your legal obligation. (Maybe you don't want to pay it or have other uses for the money, but you *could* pay it.)

Basically, your options are:

1) Keep paying the loan over time, per its terms, until you can sell the house in a non-short sale (or just keep living there);

1a) Keep paying the loan and rent out the house;

2) Walk away from the loan and the house will be foreclosed upon, your credit will suffer, and you may be sued;

3) Declare bankruptcy to get out from under the obligation, though this also has drastic effects on your credit and not all forms of bankrutpcy may be available to you given your financial situation--discuss this with a bankruptcy attorney if you wish to explore this option.

4) Pay off the loan in its entirety; then you can live in the home, sell it for whatever you can get, or rent it. For whatever it's  worth, this is what I personally would do, since by paying it off you are saving 6% on $163k annually--that's a better return than you can get with any safe or even moderately safe investment (you have to get risky in this market to make more than 6%). This option provides a good, no-risk, financial return and preserves maximum freedom of options for you.

However, you have to decide what works best for you, in light of all your finances and also your personality. For example, I am personally debt and risk adverse, which is why I tend to favor using surplus cash to eliminate debt. People who are more debt and risk tolerant, or who need the cash for some important defined purpose (e.g. starting a new business; paying medical care costs; paying for  higher ed; etc.) would come to a different conclusion.

All that said, your options do come down to pay over time per the loan; pay all now; default and take the consequences; or bankruptcy. You can try to get the bank to agree to a modification or short sale, but it is unlikely they will do so givenn your resources. Good luck.