Your title commitment just came back with “mineral rights reserved” sitting on Schedule B, and your loan officer went quiet. So is the HELOC dead? Almost never. But it almost always closes with conditions attached – an ALTA 35 series endorsement from the title underwriter, a recorded surface use waiver from the mineral owner, or affirmative coverage language addressing surface entry risk.
Fannie Mae Selling Guide B7-2-05 permits outstanding mineral rights as a title exception when they’re customarily waived in the area and don’t materially alter the contour of the property or impair its value or use as a residence. That’s the agency test, full stop. Lender overlays and title underwriter requirements fill in the rest.
Severance, Lease, and Encumbrance Are Not the Same Thing
Readers routinely conflate three concepts, and the distinction decides which cure your file needs.
Severance is a permanent separation of the mineral estate from the surface estate. A prior deed reserved or conveyed the oil, gas, coal, or other minerals to someone else, and that ownership runs with the land. You can’t buy back a severed estate without finding and negotiating with the mineral holder, which (depending on how many heirs the original owner left behind) can be its own small nightmare.
An oil, gas, or coal lease is a temporary grant by whoever currently owns the mineral estate. If you own your minerals and sign a lease, you still own them. But if a third party owns severed minerals and signs a lease, the lessee operates under their lease, not yours.
An encumbrance or lien is a security interest in the property. Severance is neither.
A severed mineral estate doesn’t get subordinated the way a PACE lien or a mechanics lien does, because it’s not a lien at all.
The mineral estate is a separate estate in the land, so it doesn’t sit in your lien priority chain. And a second-lien lender’s concern here is collateral integrity, not priority.
Why a HELOC Lender Cares Even on a Second Position
If the mineral holder (or their lessee) holds an implied right of reasonable surface use to extract the minerals, that activity can damage the dwelling. Vibration, access roads, pits, pipelines, and the pumpjack itself narrow the buyer pool and encumber the surface owner’s quiet enjoyment.
For the lender, the risk is simple. The collateral securing the second lien could lose value or become unmarketable through activity the lender can’t prevent. So a HELOC underwriter in Midland, Weatherford, or Morgantown – someone who has probably seen a dozen of these files cross their desk this quarter alone – treats a mineral exception as a line item to cure before the file ever reaches final sign-off, not something to wave through at the eleventh hour.
What Fannie Mae, Freddie Mac, and the Agencies Actually Say
Fannie Mae Selling Guide B7-2-05 lists oil, water, or mineral rights customarily waived by other lenders as an acceptable minor title impediment, subject to two tests. The rights must not materially alter the contour of the property, and they must not impair the property’s value or its usefulness for its intended purposes. Those are the only two tests in the agency text. Everything else is lender overlay or title underwriter policy.
Freddie Mac’s Single-Family Seller/Servicer Guide accepts existing oil, gas, or mineral rights as title exceptions where they’re commonly granted in the local area and don’t damage the property or impair its use or marketability as a residence. The guide was restructured during the 2023 to 2024 period, so confirm the live section reference against the current Freddie guide at closing.
FHA touches mineral severance only through products that attach to residential real estate, such as 203(k) rehab or Title I. There’s no FHA HELOC. VA treatment sits outside the scope of second-lien home equity products. And USDA Rural Development permits a loan officer to waive a mineral title exception, often paired with a mineral endorsement from the title underwriter.
Several lender overlays sit on top of these agency rules. A common one requires that the mineral owner retain no right of surface entry within a defined buffer of the dwelling. Some aggregator seller guides, including Pennymac correspondent documentation cited by title practitioners, reference a 200 foot no-surface-entry buffer. Informal lender practice in some energy regions references roughly 5 acres for conventional loans and roughly 10 acres for FHA loans between the dwelling and permitted drilling. But none of these buffer figures appear in the base Fannie Mae or Freddie Mac language. Treat them as lender-specific overlays and confirm the exact overlay with your originator before you spend money on a title search assuming any of them apply.
ALTA 35 Series: What It Insures and What It Does Not
The ALTA 35-06 endorsement family is the title underwriter’s instrument for mineral risk on residential loans. In plain English, an ALTA 35 is insurance against your house being torn down to get at the minerals. The variants cover different situations – the base 35 covers forced removal of existing improvements on surveyed land, the 35.1 covers improvements not yet built (described per plans and specifications), the 35.2 covers improvements described specifically within the endorsement itself, and the 35.3 covers improvements on land under development.
Here’s the catch: the exclusions matter as much as the coverage. ALTA 35 doesn’t insure against contamination, explosion, fire, vibration, fracturing, earthquake, subsidence, or negligence by the extracting party. Treating ALTA 35 as blanket mineral protection means overclaiming the policy. The endorsement answers one question. If the mineral holder exercises surface rights and forces removal of the dwelling, the title insurer indemnifies.
In California, CLTA 100.24 is the lender endorsement that insures the lessee under a disclosed mineral, oil, or gas lease has no right to enter the surface. Other states use their own analog forms. When no endorsement is available or affordable, the cure is often negotiated affirmative coverage language, where the title underwriter writes specific protective language into Schedule B.
Surface Use Waivers and Surface Use Agreements
A surface use waiver is a recorded instrument in which the mineral owner relinquishes the right of surface entry. Once recorded, it binds successor mineral holders and gives the lender a durable paper cure for the collateral integrity question.
A surface use agreement doesn’t waive entry. Instead, it confines the mineral holder to a defined area with setbacks from the dwelling, access roads routed to the parcel boundary, and operational limits agreed in writing. Enforceability against successor mineral holders depends on recording, on the specific language, and on state law. So review by counsel is the standard step before signing either instrument.
How Severance Shows Up in the Appraisal
The URAR Form 1004 has no dedicated field for severed minerals. The appraiser addresses the condition in the comparables narrative, the site description, and the highest and best use analysis.
Severance on a non-producing suburban lot is often documented and set aside with no value adjustment. But in an active producing area with surface entry rights intact, the appraiser may select comparables reflecting the surface risk and the narrowed buyer pool. No published Fannie Mae or Freddie Mac rule assigns a fixed valuation adjustment for severance. The impact depends on the appraiser’s local market read and the comparable set available.
State Hot Spots
Severance concentrates where oil, gas, coal, or shale have been produced historically. Texas, Oklahoma, Louisiana, New Mexico, Colorado, and North Dakota sit on the oil and gas side. Pennsylvania, West Virginia, Ohio, and Kentucky carry shale and coal severance from decades of broad-form deeds that split surface and subsurface estates. West Virginia homeowners frequently discover severance only during a title search for a HELOC or refinance – the deed from 1912 that split everything off tends to come as a surprise.
Dormant mineral statutes in states including Wisconsin, Ohio, Indiana, New Mexico, and North Dakota permit a surface owner to recapture severed minerals after a defined non-use period. But the recapture period, notice procedure, and dormancy triggers vary by state. Verify the statute, period, and current procedure with a local real estate attorney before relying on recapture as a path forward.
Homeowner Insurance in Energy Regions
Standard homeowner policies typically exclude damage from subsidence, sinkhole collapse, and mineral extraction operations. In active basins, some lenders require specific endorsements or evidence of insurability before closing. Worth knowing: ask your originator whether the lender’s property insurance checklist includes a mineral or extraction-related endorsement for your zip code, and ask your agent what the base policy already excludes.
What to Do When Title Lists a Mineral Exception
Start by asking the title company whether an ALTA 35 series endorsement is available in your state and what the premium will run. Then ask the lender whether a recorded surface use waiver from the mineral owner is acceptable in place of, or in addition to, the endorsement. Check whether the state has a dormant mineral statute that could support recapture, and ask the appraiser to address the severance in the site description and comparables narrative. If the mineral owner is a corporate operator with an active lease, ask the title company about affirmative coverage language and whether a lessee subordination of surface rights is on the table. And escalate to a title attorney when the deed language is ambiguous, when the state is a known broad-form jurisdiction (West Virginia being the obvious example), or when the mineral owner simply refuses to execute a waiver.
Most second-lien files close with one of these cures in place. The friction is procedural, not categorical. A severed mineral estate is a title condition the industry has handled for decades, and the ALTA 35 series exists specifically to insure around it on a loan policy.
Frequently Asked Questions
Can I get a home equity loan if someone else owns the mineral rights?
Usually yes, with conditions. Lenders typically require an ALTA 35 series endorsement, a recorded surface use waiver, or affirmative coverage language addressing surface entry risk.
Do severed mineral rights lower my home appraisal?
Not automatically. On a non-producing lot the appraiser often documents and sets the condition aside. But in an active producing area with surface rights intact, comparables may reflect a narrower buyer pool. No agency rule assigns a fixed adjustment.
What is an ALTA 35 endorsement and do I need one for a HELOC?
ALTA 35-06 is a title insurance endorsement protecting the lender if the mineral holder exercises surface rights and forces removal of improvements. Many HELOC lenders accept it as the cure for a mineral exception; some require it.
What is a surface use waiver and who signs it?
It’s a recorded instrument signed by the mineral owner relinquishing the right to enter the surface for extraction. Once recorded, it binds successor mineral holders.
Does Fannie Mae allow mineral rights as a title exception?
Yes, under Selling Guide B7-2-05, provided the rights are customarily waived in the area and don’t materially alter the property’s contour or impair its value or use as a residence.
Will a HELOC lender require the mineral owner to subordinate?
No. Severance isn’t a lien and doesn’t get subordinated. The cure is coverage or waiver of surface entry, not lien priority.
Can an oil and gas company drill under my house if someone else owns the minerals?
Horizontal drilling from a surface location elsewhere is often possible without entering your surface. But direct surface entry on your parcel depends on the deed language, state law, and any waiver on record.
Can I recover severed mineral rights under a dormant minerals statute?
Possibly, in states that have one, after a defined non-use period and specific notice procedures. But the rules vary by state. Speak with a local real estate attorney before relying on recapture.
Requirements vary by state, title underwriter, and lender overlay. Confirm the current overlay with your originator and review the deed language with counsel before signing a surface instrument.
