Before the foreclosure crisis, federal and state laws regulating mortgage servicers and foreclosure procedures were relatively limited and tended to favor foreclosing lenders. However, many federal and state laws now give protections to borrowers. Servicers generally must provide borrowers with loss mitigation opportunities, account for each foreclosure step, and carefully comply with foreclosure laws.
Also, most people who take out a loan to buy a residential property in Kentucky sign a promissory note and mortgage. These documents usually give homeowners certain contractual rights after a home loan default.
So, don't get caught off guard if you're a homeowner behind in mortgage payments. Learn about foreclosure laws in Kentucky and how the Kentucky foreclosure process works, from missing your first payment to a foreclosure sale.
In a Kentucky foreclosure, you'll most likely get the right to:
Once you understand the Kentucky foreclosure process and your rights, you can make the most of your situation and, hopefully, work out a way to save your home or at least get through the process with as little anxiety as possible.
The period after you fall behind in payments, but before a foreclosure officially starts, is generally called the "preforeclosure" stage. (Sometimes, people refer to the period before a foreclosure sale happens as "preforeclosure," too.)
During the preforeclosure period, the servicer can charge you various fees. Also, in most cases, federal law requires the servicer to let you know how to avoid foreclosure, and most mortgage contracts require the servicer to send you a breach letter.
Under federal law, the servicer usually can't officially begin a foreclosure until you're more than 120 days past due on payments, subject to a few exceptions. (12 C.F.R. § 1024.41). This 120-day period provides most homeowners ample opportunity to submit a loss mitigation application to the servicer.
If you default on your mortgage payments for your home in Kentucky, the foreclosure will be judicial.
A judicial foreclosure begins when the lender files a lawsuit asking a court for an order allowing a foreclosure sale. The lender gives notice of the suit by serving you a summons and complaint. You generally get 20 days after service to file an answer. (Ky. R. Civ. P. 4.02).
If you don't respond to the suit, the lender will ask the court for, and probably receive, a default judgment, allowing it to hold a foreclosure sale. (The court might send the matter to the master commissioner, a court-appointed official, for a foreclosure recommendation. If the judge agrees with the recommendation, the lender gets a default judgment and wins the case.)
But if you choose to defend the foreclosure lawsuit, the case will go through the litigation process. The lender might then ask the court to grant summary judgment. A summary judgment motion asks that the court grant judgment in favor of the lender because there's no dispute about the critical aspects of the case. Again, the commissioner might review the motion. If the commissioner recommends that the court should grant the motion, and the court agrees, the court will enter a judgment for the lender.
The commissioner will then administer the foreclosure sale by preparing a notice of sale that is typically posted at or near the property and published in a newspaper. (Ky. Rev. Stat. § 426.200, § 424.130, § 426.560). Two appraisers will perform a drive-by inspection of the property.
At the sale, the lender usually makes a credit bid. The lender can bid up to the total amount owed, including fees and costs, or it may bid less. In some states, including Kentucky, when the lender is the high bidder at the sale but bids less than the total debt, it can get a deficiency judgment against the borrower. The property becomes "Real Estate Owned" (REO) if the lender is the highest bidder.
But if a bidder, say a third party, is the highest bidder and offers more than you owe, and the sale results in excess proceeds (that is, money over and above what's needed to pay off all the liens on your property) you're entitled to that surplus money.
Under Kentucky law, the new owner from the foreclosure sale gets the right to possess the property after giving the former owner ten days' notice. Then, the purchaser can get a writ of possession from the court. (Ky. Rev. Stat. § 426.260).
A few potential ways to stop a foreclosure and keep your home include reinstating the loan, redeeming the property before or after the sale, or filing for bankruptcy. Working out a loss mitigation option, like a loan modification, will also stop a foreclosure.
Or you might be able to work out a short sale or deed in lieu of foreclosure and avoid foreclosure. (But you'll have to give up your home with a short sale or deed in lieu of foreclosure transaction.)
Kentucky law doesn't provide a statutory right to reinstate the loan before the sale unless the loan is a high-cost home loan. Before filing a complaint to foreclose a high-cost home loan, the lender has to provide a notice of default to the borrower that gives 30 days to cure the default and reinstate the mortgage. (Ky. Rev. Stat. § 360.100).
However, many mortgages, like the uniform Fannie Mae/Freddie Mac mortgage, give the borrower the right to cure the default after acceleration and reinstate the loan. Check your loan documents to determine if you get a reinstatement right and, if so, the deadline to complete one. Or your lender might agree to let you reinstate the loan.
One way to stop a foreclosure is by "redeeming" the property. To redeem, you have to pay off the full amount of the loan before the foreclosure sale.
Some states also provide foreclosed borrowers a redemption period after the foreclosure sale, during which they can buy back the home. Under Kentucky law, if the home sells for less than two-thirds of the appraised value, the redemption period is six months after the sale. (Ky. Rev. Stat. § 426.530).
If you're facing a foreclosure, filing for bankruptcy might help. In fact, if a foreclosure sale is scheduled to occur in the next day or so, the best way to stop the sale immediately is by filing for bankruptcy.
Once you file for bankruptcy, something called an "automatic stay" happens. The stay functions as an injunction prohibiting the lender from foreclosing on your home or trying to collect its debt, at least temporarily.
In many cases, filing for Chapter 7 bankruptcy can delay the foreclosure by a matter of months. Or, if you want to save your home, filing for Chapter 13 bankruptcy might be the answer. To find out the options available, speak with a local bankruptcy attorney.
The Servicemembers Civil Relief Act provides legal protections to military personnel facing foreclosure.
In a foreclosure, the borrower's total mortgage debt frequently exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a "deficiency." For example, say the total debt owed is $450,000, but the home sells for $400,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount—in our example, $50,000—from the borrower.
Kentucky law permits deficiency judgments.
In Kentucky, the lender may generally get a judgment for the deficiency. (Ky. Rev. Stat. § 426.005).
A foreclosure could result in serious consequences, like lower credit scores, a deficiency judgment (as discussed above), or tax ramifications.
Get tips on what to do—and what not to do—if you're facing a foreclosure.
Learn about last-minute strategies to stop foreclosure.
Find out if foreclosures are on the rise.
For more information on federal mortgage servicing laws and foreclosure relief options, go to the Consumer Financial Protection Bureau (CFPB) website.
If you have questions about Kentucky's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney. Talking to a HUD-approved housing counselor about different loss mitigation options is also a good idea.