finance

novation of loan

Novation of a loan occurs when a lender agrees to substitute a new borrower for the original one and formally releases the original borrower from all liability. It often accompanies a loan assumption in which the buyer qualifies with the lender. Without novation, the original borrower may remain secondarily liable if the new borrower defaults. Novation requires the agreement of the lender, the original borrower, and the new borrower.