Why Title Insurance Exceptions Matter for Your Mortgage
When you buy a home, your lender requires title insurance to protect against ownership disputes and property defects. The title insurance policy lists "exceptions" — issues the insurance company won't cover. Some homebuyers panic when they see these exceptions, thinking they'll derail their loan.
Most exceptions are routine and won't affect your mortgage approval. Fannie Mae has specific rules about which exceptions lenders can accept without additional review or documentation.
Say you're buying a home where the title policy shows an exception for a utility easement running across the back corner of your lot. If that easement is for underground gas lines and doesn't interfere with your house or yard use, your lender can proceed with the loan under these guidelines.
Utility Easements: The Most Common Exceptions
Utility easements appear on most residential properties. These give utility companies the right to install and maintain infrastructure on specific parts of your land.
Subsurface easements for underground utilities like gas, water, electric, phone, or cable lines are acceptable if the easement location is clearly defined and doesn't interfere with your home or planned improvements. The utility company can access their lines, but this typically doesn't affect your daily life.
Surface easements for above-ground utilities follow similar rules but have stricter requirements. The easement must not interfere with your house, any planned improvements, or your use of the rest of your property outside the easement area.
A power line easement running along your property's edge would be acceptable. An easement that cuts through your planned deck location might create problems.
When Your Improvements Encroach on Easements
Sometimes your property improvements sit partially on utility easements. A detached garage or tool shed that encroaches on a utility easement is acceptable as long as it doesn't prevent the utility company from accessing or maintaining their infrastructure.
Your attached garage that sits on a utility easement would be problematic because it's part of your main dwelling. A small storage shed in the same location might be fine.
Restrictive Covenants and HOA Rules
Many neighborhoods have restrictive covenants that control how you can use your property. These might cover architectural styles, minimum house sizes, setback requirements, or building materials.
These restrictions are acceptable exceptions if they meet three conditions. First, they cannot create a lien that takes priority over your mortgage. Second, they must be commonly accepted by other mortgage investors in your area. Third, your title insurance must include an endorsement confirming no current violations exist and that future violations won't cause you to lose your property.
Your HOA covenant requiring brick exteriors and 2,500 square foot minimums would typically be acceptable. A covenant giving the developer the right to reclaim your property for any violation would not be.
Shared Driveways and Party Walls
Mutual easement agreements for shared driveways or party walls between properties are acceptable if they're properly documented. The agreement must give you and all future owners unlimited use of the shared improvement.
You're buying a townhouse with a shared driveway between you and your neighbor. The mutual easement agreement must guarantee both properties permanent access rights and spell out maintenance responsibilities.
Property Line Issues and Encroachments
Minor fence misplacements along property lines are acceptable exceptions. The fence location error cannot interfere with your house or your use of the remaining property. This exception specifically excludes retaining walls or permanent structures.
Your neighbor's fence sits two feet onto your property along the back corner. If this doesn't affect your house or yard use, it's an acceptable exception. Their deck extending onto your property would be a different story.
Encroachments work both ways. If your neighbor's improvements slightly cross onto your property without touching your house or interfering with your property use, that's acceptable. If your eaves, driveway, or detached structures encroach onto neighboring property, you need title insurance endorsement protecting against removal orders.
Mineral Rights and Underground Resources
Outstanding oil, gas, water, or mineral rights are acceptable in areas where these exceptions are common, but only under specific conditions. The rights holder cannot have surface or subsurface entry rights within 200 feet of your house, or you need comprehensive title insurance coverage against damage from their activities.
In Texas or Oklahoma, mineral rights exceptions are routine. In suburban Connecticut, they'd be unusual and might require additional review.
Tax Liens and Tenant Rights
Liens for property taxes that aren't yet due and payable are acceptable exceptions. These appear when property taxes are assessed but the payment deadline hasn't arrived.
Rights of tenants under unrecorded leases are also acceptable. This typically applies when you're buying a property where someone lives under a lease that wasn't formally recorded in public records.
Solar Panel Financing
Solar panel liens and leases, including UCC-1 financing statements, are acceptable exceptions if they only list the solar panels as collateral. The financing cannot extend to your house or other property improvements.
The Catch-All Rule for Other Exceptions
Any exception not specifically covered in the guidelines can still be acceptable if it meets five strict conditions. The exception cannot interfere with your property use or enjoyment. It cannot affect your property's marketability or significantly impact its value. Your mortgage insurance company (if you have one) must approve it. Other mortgage investors in your area must commonly accept similar exceptions.
What Documents Your Lender Needs
Your lender will review the title insurance policy or attorney's opinion of title letter to identify all exceptions. For certain exceptions, they'll require specific title insurance endorsements that provide additional coverage.
For restrictive covenant exceptions, you need an endorsement confirming no current violations and protecting against future violation consequences. For encroachment exceptions, you need an endorsement protecting against removal orders.
Your lender will also verify that exceptions are commonly accepted in your local market by checking with other investors and reviewing comparable transactions.
Common Problems That Can Derail Your Loan
Exceptions that affect your house directly or prevent normal residential use will cause problems. A utility easement running through your living room or a restrictive covenant that could force property forfeiture won't be acceptable.
Exceptions that significantly impact property value or marketability also create issues. An easement that prevents you from adding a planned addition or a covenant that restricts resale to specific buyers might not meet the guidelines.
If your area doesn't commonly accept certain types of exceptions, your lender may require additional review or documentation even for otherwise acceptable items.
References
For the official guidelines, see 4702.4: Acceptable exceptions to the title insurance policy or to the attorney's opinion of title letter in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains requirements related to:
Surface public utility easements
Encroachments on public utility easements
Restrictive agreements and restrictive covenants
Fence misplacements
Encroachments on the Mortgaged Premises by improvements on adjoining property
Other exceptions
The following exceptions to the title insurance policy or to the attorney opinion of title letter are acceptable:
(a)
Subsurface public utility easements
Exceptions for subsurface public utility easements for local residential distribution, such as lines for gas and water, and cable for electric, telephone or television utilities, are acceptable provided that the location of the easements is ascertainable and fixed. The exercise of the rights thereunder must not interfere with the use and enjoyment of any present improvements on the Mortgaged Premises or proposed improvements on which the appraisal or Mortgage is based.
(b)
Surface public utility easements
Exceptions for surface easements for public utilities for local residential distribution are acceptable provided that the location of the easements is ascertainable and fixed. The exercise of the rights thereunder must not interfere with the use and enjoyment of any of the following:
Present improvements on the Mortgaged Premises
Proposed improvements upon which the appraisal or Mortgage is based
Part of the Mortgaged Premises outside the easement and not occupied by improvements
(c)
Encroachments on public utility easements
Exceptions for encroachments on easements for public utilities by a garage, tool shed or similar structure that is not attached to, or a portion of, the dwelling structure are acceptable provided that the encroachments do not interfere with the use and enjoyment of the easements or the exercise of rights of repair and maintenance in connection therewith.
(d)
Restrictive agreements and restrictive covenants
Exceptions for restrictive agreements or restrictive covenants of record related to cost, use, setback, resale restrictions, right of first refusal, minimum size and building materials, and architectural, aesthetic or similar matters (other than single-family-use restrictions on 2- to 4-unit properties) are acceptable provided that the following conditions are met:
The restrictive agreements or restrictive covenants do not create or provide for any lien that would be prior to the lien of the Home Mortgage nor provide for the elimination of the lien of the Home Mortgage
The terms and provisions of the restrictive agreements or restrictive covenants are commonly acceptable to private institutional Mortgage investors in the area where the Mortgaged Premises is located
An endorsement to the title insurance policy affirmatively insures that no violation of any such restrictive agreement or restrictive covenant exists and that any future violation shall not result in forfeiture or reversion of title
(e)
Mutual easement agreements
Exceptions for mutual easement agreements of record that establish a joint driveway or a party wall are acceptable if such improvements are constructed in any of the following ways:
Partly on the Mortgaged Premises and partly on adjoining property
Wholly on the adjoining property
The easement agreement must allow all present and future owners and their heirs, successors and assigns forever, unlimited use and enjoyment of the driveway or party wall without any restriction other than restriction by reason of the mutual easement owners' rights in common and duties for joint maintenance.
(f)
Fence misplacements
Exceptions for fence misplacements on either side of the property line of the Mortgaged Premises are acceptable provided that neither the misplacement, nor a future correction thereof, will interfere with the use and enjoyment of any improvements on the Mortgaged Premises nor with the use and enjoyment of the balance of the Mortgaged Premises not occupied by improvements. The definition of fence in this section shall not include retaining walls or other permanent structures.
(g)
Encroachments on the Mortgaged Premises by improvements on adjoining property
Exceptions for encroachments on the Mortgaged Premises by improvements on adjoining property are acceptable provided that the following conditions are met:
The encroachment must not touch any improvements on the Mortgaged Premises
The encroachment must not interfere with the use and enjoyment of any improvements on the Mortgaged Premises nor with the use and enjoyment of the Mortgaged Premises not occupied by improvements
(h)
Encroachments on adjoining property
Exceptions for encroachments on adjoining property by eaves or other projections attached to improvements on the Mortgaged Premises, or by structures such as tool sheds, or by a driveway appurtenant to the Mortgaged Premises, are acceptable provided that there is an endorsement to the title insurance policy whereby the policy affirmatively insures against loss suffered by reason of the entry of a decree or court order requiring the removal of the encroachment.
(i)
Oil, gas, water and mineral rights
Exceptions for outstanding oil, gas, water or mineral rights are acceptable if commonly granted by private institutional Mortgage investors in the area where the Mortgaged Premises is located, and:
The exercise of such rights will not result in damage to the Mortgaged Premises or impairment of the use or marketability of the Mortgaged Premises for residential purposes and there is no right of surface or subsurface entry within 200 feet of the residential structure, or
There is a comprehensive endorsement to the title insurance policy that affirmatively insures the lender against damage or loss due to the exercise of such rights
(j)
Liens for taxes not due
Exceptions for liens for real estate or ad valorem taxes and assessments that specifically state that such liens are not yet due and payable are acceptable.
(k)
Sums readvanced
This includes the priority of the lien for any sum repaid and subsequently readvanced under the terms of the Mortgage insured thereby.
(l)
Tenants in possession
Exceptions for rights of tenants in possession, as tenants only, under prior unrecorded leases are acceptable.
(m)
Liens and leases for solar panels
Exceptions for liens and leases, including UCC-1 Financing Statements, for solar panels are acceptable provided the exception is for a lien or lease that lists only the solar panels as the collateral.
(n)
Sections 4702.4(a) through 4702.4(m)
is acceptable only if all of the following conditions are met:
The subject of the exception must not interfere with the use and enjoyment of any present or proposed improvements on the Mortgaged Premises or with the use and enjoyment of the balance of the Mortgaged Premises not occupied by improvements
The subject of the exception must not affect the marketability of the Mortgaged Premises
The subject of the exception must have no or minimal effect on the value of the Mortgaged Premises
The subject of the exception must be acceptable to the MI if the Mortgage is insured
The subject of the exception must be commonly acceptable to private institutional Mortgage investors in the area where the Mortgaged Premises is located
The Seller shall warrant that all exceptions to the title insurance policy or to the attorney opinion of title letter are permissible under this section. Freddie Mac will not issue any letters addressing the acceptability of particular exceptions nor waivers of the above requirements.
