How Oil, Gas and Mineral Rights Affect Mortgages

Oil, gas and mineral rights can mean big money for homeowners.

But does signing an extraction lease mean no new mortgages for the owner or subsequent buyers?

The answer: it depends.

The term "mineral rights" refers to the ownership and use of whatever's below the surface of a property. That might include not only minerals per se, but also water, oil, gas or coal. A mineral lease is a contract that allows someone other than the property owner to extract and exploit the minerals. One common type of contract is an oil and gas lease.

Jerry Simmons, executive director of the National Association of Royalty Owners, a nonprofit group in Tulsa, Okla., says he's never heard of a mortgage being held up due to mineral rights.

"I have members in all 50 states," he says. "I haven't asked all of them, obviously. But I put the feelers out to our board of directors and state chapters, and nobody has heard of any problems like that." If borrowers had problems getting mortgages on land with mineral leases, Simmons is sure he would have heard about it.

State laws Add to The Complexity

Judon Fambrough, an attorney at the Real Estate Center at Texas A&M University in College Station, says the potential relationships between mineral rights and mortgages are quite complicated.

Fambrough's list of variables is long. He says state laws can limit or expand the rights of property owners, mineral owners and mineral extraction companies. Zoning ordinances can dictate where drilling is -- and isn't -- permitted. One lender could be reluctant to make a loan where a lease allowed trucks to enter and exit, while another lender might be eager to make a loan where a lease would generate income the borrower could apply to the debt. More complexities crop up when an owner sells a property but retains the mineral rights.

Contract is Crucial

When laws grant broad rights to mineral owners, the solution is a contract that protects the property owner. Simmons says that's why property owners need to know what mineral rights they own, read any leasing contract that affects their property and, if necessary, hire an attorney to represent their interests.

"I'm flabbergasted that someone would sign a legal contract on the stuff underneath the ground they live on and not know what's in the paper they signed. It just boggles my mind," he says. "You have to educate yourself."

FHA Rules: Keep Your Distance

The Federal Housing Administration, or FHA, Fannie Mae and Freddie Mac all have something to say about mineral rights. Together, these three entities set standards for most U.S. mortgages.

The FHA guidelines state that existing homes must be at least 300 feet from any active or planned oil or natural gas drilling site. New or proposed construction must be at least 75 feet away, unless measures are taken to mitigate noise and reduce the chance of contamination from spills. That distance is cut to 10 feet if a drilling site has been abandoned in compliance with local safety requirements. Minimum distances from petroleum product wells are established after an engineering assessment.

The FHA doesn't track how many mortgage insurance applications are denied due to drilling operations. But those short distances suggest the number would be few, and the FHA says that's a reasonable assumption.

Fannie, Freddie Follow Local Customs

Fannie Mae won't purchase or securitize any mortgage if the property has a "title impediment," a technical term that refers to a claim of ownership or property rights. Among the allowable exceptions, however, are existing oil, water or mineral rights that are "customarily waived by other lenders" and "do not materially alter the contour of the property or impair its value or usefulness for its intended purposes."

Current homeowners who want to assign such rights must submit an Application for Release of Security and a copy of the proposed lease to the loan servicer.

Before granting a release, the servicer must consider the effect on the owner's property rights, the potential effects of any hazards, nuisances or damages, and local customs and community attitudes.

Freddie Mac's guidelines also allow title exceptions. Existing oil, gas or mineral rights are among these exceptions, if certain conditions are met. The rights must be "commonly granted" by lenders in the local area and must not result in any damage to the property or impairment of the property's use or marketability as a residence. No right of surface or subsurface entry is allowed within 200 feet of a residence, and a title policy endorsement is required to protect the lender.