Novation
National Real Estate Exam glossary · Financing
Definition
The substitution of a new contract or a new party for an existing one, with the consent of all parties, discharging the original obligation. When a buyer assumes a loan and the lender releases the original borrower through novation, the seller is freed from further liability.
Novation in plain English
Novation is when everyone agrees to swap out an old contract (or one of the people in it) for a new one, so the original deal is completely erased and replaced. The key is that ALL parties must agree — you can't just hand off your obligations without permission. Imagine you sell your car but still owe money on the loan; the buyer takes over the payments and, crucially, the bank formally agrees to release YOU and hold only the buyer responsible. Without that formal release, you'd still be on the hook if the buyer stopped paying — novation is what actually frees you.
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