If you default on your mortgage payments in Kentucky, the servicer (on behalf of the loan owner, called the "lender" in this article) will eventually begin a foreclosure. Kentucky law specifies how foreclosures work, and both federal and state laws give you rights and protections throughout the process.
If you get a loan to buy residential real estate in Kentucky, you'll likely sign two documents: a promissory note and a mortgage. The promissory note is the document that contains your promise to repay the loan along with the repayment terms. The mortgage is the document that gives the lender a security interest in the property. If you fail to make the payments, the mortgage provides the lender with the right to sell the home at a foreclosure sale to recoup the money it loaned you.
If you miss a payment, the servicer can usually charge a late fee after the grace period expires. Most mortgage loans give a grace period of ten to fifteen days, for example, before you’ll incur late charges. To find out the grace period in your situation and the amount of the late fee, review the promissory note or your monthly billing statement.
If you miss a few mortgage payments, the servicer will probably send letters and call you to try to collect. Federal mortgage servicing laws require the servicer to contact you (or attempt to contact you) by phone to discuss foreclosure alternatives—called "loss mitigation" options—no later than 36 days after a missed payment and again within 36 days after each following missed payment. No more than 45 days after a missed payment, the servicer must let you know in writing about loss mitigation options that could be available and assign personnel to help you. Some exceptions to a few of these requirements exist, like if you file for bankruptcy or tell the servicer not to contact you under the Fair Debt Collection Practices Act. (12 C.F.R. § 1024.39).
Many Kentucky mortgages have a provision that requires the lender to send a breach letter if you fall behind in payments. This notice tells you that the loan is in default. If you don’t cure the default, the lender can accelerate the loan (call it due) and go ahead with the foreclosure.
Federal law generally requires the servicer to wait until the loan is over 120 days delinquent before officially starting a foreclosure. But in a few situations, like if you violate a due-on-sale clause or if the servicer is joining the foreclosure action of a superior or subordinate lienholder, the foreclosure can begin sooner. (12 C.F.R. § 1024.41).
Approximately half of the states, including Kentucky, require the lender to file a lawsuit in court to foreclose. This process is called a "judicial" foreclosure. The lender gives notice of the suit by serving you (the borrower) a summons and complaint. You’ll get 20 days after service to file a response to the complaint. (Ky. R. Civ. P. 4.02).
If you fail to answer the court action, the lender can ask for a default judgment. Often, the court will send the matter to the master commissioner (a court-appointed official) for a foreclosure recommendation. If the commissioner recommends foreclosure and the judge agrees, the lender wins the case. But if you respond to the lawsuit, the case will go through the litigation process. The lender might then request the court to grant summary judgment. A summary judgment motion asks that the court grant judgment in favor of the lender because the case’s critical aspects aren’t in dispute. The commissioner will, again, probably review the motion. If the commissioner recommends the court should grant the motion, and the judge agrees, the court will enter a judgment for the lender. If the court grants summary judgment for the lender—or you lose at trial—the judge will order the home sold at a foreclosure sale.
Before the sale, a notice must be posted on the courthouse door and three other places and published in a newspaper. (Ky. Rev. Stat. Ann. §§ 426.200, 424.130, 426.560). Two appraisers will complete a drive-by inspection of the property.
The process ends with a foreclosure sale. The lender usually makes a bid on the property using what’s called a "credit bid" rather than bidding cash. With a credit bid, the lender gets a credit up to the amount of the borrower’s debt. The highest bidder at the sale becomes the new owner of the property.
"Reinstating" is when you catch up on the missed payments, plus fees and costs, to stop a foreclosure. Under Kentucky law, you don't get the right to reinstate 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. Ann. § 360.100).
But even when state law doesn’t provide a reinstatement right, the terms of the mortgage contract might give you the ability to reinstate the loan, or the lender might agree to let you complete a reinstatement.
Sometimes, a foreclosure sale doesn’t bring in enough money to pay off the full amount owed on the loan. The difference between the sale price and the total debt is called a "deficiency balance." Many states, including Kentucky, allow the lender to get a personal judgment, called a "deficiency judgment," for this amount against the borrower.
Kentucky law generally permits the lender to get a deficiency judgment. (Ky. Rev. Stat. Ann. § 426.005).
Some states have a law that gives a foreclosed homeowner time after the foreclosure sale to redeem the property. In Kentucky, if the home sells for less than two-thirds of its appraised value at the foreclosure sale, you get six months to redeem the property. (Ky. Rev. Stat. Ann. § 426.530).
In Kentucky, the purchaser from the foreclosure sale is entitled to possession of the property after ten days' notice to the former owners. If the foreclosed owners don't leave, the purchaser can get a writ of possession from the court. (Ky. Rev. Stat. Ann. § 426.260).
Foreclosure laws are complicated. Servicers and lenders sometimes make errors or forget steps. If you think your servicer or lender failed to complete a required step, made a mistake, or violated state or federal foreclosure laws, you might have a defense that could force a restart to the foreclosure or you might have leverage to work out an alternative. Consider talking to a local foreclosure attorney or legal aid office to learn about your rights. A lawyer can also tell you about different ways to avoid foreclosure. Likewise, a HUD-approved housing counselor can provide helpful information (at no cost) about various alternatives to foreclosure.