Novation
Novation is a legal process where an original contract is completely replaced with a new contract, releasing the original parties from their obligations. In real estate, this typically occurs when a new party takes over an existing mortgage or lease agreement, with the lender's consent, completely substituting for the original borrower or tenant.
Example
“Through novation, the original buyer was completely released from the purchase contract when a new buyer took over all obligations.”
Memory Tip
Novation creates something NOVel (new) - think 'renovation' but for contracts instead of houses.
Why It Matters
Novation completely releases you from liability under the original contract, unlike an assignment where you might remain responsible if the new party defaults. This provides clean separation and peace of mind when transferring property obligations to someone else.
Common Misconception
People often think novation and assignment are the same thing, but assignment typically leaves the original party still liable while novation completely releases them.
In Practice
When selling your home with an assumable VA loan, the buyer can request novation from the VA and lender. If approved, you're completely released from the mortgage debt, and only the new buyer is responsible for future payments.
Etymology
From Latin 'novatus' meaning 'made new,' as this legal process creates an entirely new contract to replace the old one.
Common Misspellings
Compare today's mortgage rates
More in real estate
Other real estate terms you should know
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.