I have known investors to do it in this area.
I believe it is forbidden in any type of foreclosure transaction..
Also, it's generally a bad idea from the investor's standpoint . . . leaving aside the legal risks. You've identified yourself as "Home Buyer," so presumably you're the one who'd be buying. Consider: The seller bought the house and now is unable to make payments. The seller almost definitely has missed a number of payments, so in addition to the monthly mortgage, the seller owes thousands in arrearages.
You want to buy. There are two ways to do that: Conventionally and creatively. Let's consider conventionally first. I'm just making these numbers up as an example. Let's say the seller bought the house 5 years ago for $300,000. Assume a 30-year mortgage at 6%. Back then there was 100% financing, so assume the seller started off with no equity. The principle and interest would be about $1,800 a month. (Not including taxes and insurance.) But you're telling me that the seller couldn't afford $1,800 a month.
Fast forward to today. In the first few years of a mortgage, there's almost no equity build-up. And in the past 5 years, house prices in many areas have declined. I don't know about Kentucky. Let's say it's gone down only slightly--5%, or $15,000. The house is now worth $285,000. And it's facing foreclosure, so let's assume the seller is 6 months behind in payments. That's $10,800 in back payments, not counting interest and penalties.
So the seller owes about $310,800 on a property that's now worth $285,000. You want to buy it as an investor. Practically, you'll need to pay off the back payments ($10,000), cover the drop in value ($15,000), and then put 20% down ($57,000). So can you come up with $82,000?
Let's assume you can. Now you have a mortgage of $228,000. Let's say you can get a mortgage at 6% as an investor. Your monthly principle and interest will be $1,367. But you'd also like to get some sort of return on that $82,000 you've put into the house. What's a fair number? You could put it into the bank and earn 1.5%. But that's risk free. Investors would like 20% or more. But let's be real, real conservative. Maybe you'd be happy with just a 5% return. That works out to $342 a month. So, just to cover your mortgage and to get a 5% return on the $82,000 you've invested, you need to charge $1,709 a month. (Plus taxes and insurance.)
Uh oh. The sellers couldn't afford $1,800 a month. Now you're going to charge them $1,709 AND they're going to have to pay utilities AND they're not going to get the tax deductions that come with home ownership (worth about $500 a month . . . and you think they'll be able to pay you? No way. When you factor in the loss of tax benefits, they're paying MORE than when they owned the house. If they couldn't afford $1,800 a month, how will they be able to afford $2,200 a month? Answer: They can't.
So conventional financing is out.
What about creative financing? You do a "subject to" deal. They deed their house over to you. And you make up the arrearages. The mortgage remains in their name. Using the numbers above, you only have to come up with $10,000 (plus possible interest and penalties). Congratulations. You now are responsible for $300,000 worth of payments on a property worth $285,000. So you make their $1,800 a month payments. Plus you'd like some return on your $10,000. At 5%, that's $42 a month. So you need to collect $1,842 from your new tenants.
Uh oh. They couldn't afford $1,800 a month payments. Now they need to pay you $1,842. And you're $15,000 under water.
Those numbers aren't as horrific as buying conventionally, but they still spell doom for your tenants. And once they stop paying the rent, you'd be wise to stop paying their mortgage. The foreclosure process would start again (on them, not you), and you'd be out the $10,000 you put up to get them out of foreclosure the first time.
So, likely there isn't a happy ending with either scenario.
Don't do it.