What Is a Loan Novation?

Written by tom streissguth
  • Share
  • Tweet
  • Share
  • Pin
  • Email
What Is a Loan Novation?
Loan novation can release a debtor from the obligation to repay. (Yasuhide Fumoto/Photodisc/Getty Images)

Loan novation is one method of changing a home loan, or any other type of loan. With the housing market in decline, and many homes falling in value to less than the outstanding loan amount, this practice has become more common. Many borrowers find themselves hard-pressed to meet the original terms of their loans and turn to loan novation as one possible recourse to prevent foreclosures and the loss of their properties.

Other People Are Reading

Terminology

Novation comes from the Latin word "nova," meaning "new." A novation is a process of substituting a new debtor, or in general terms, a new loan agreement, for an old one.

Agreement

The bank or other lender must approve the novation and can set the terms of the transfer, including the repayment schedule; any fees that may be charged for the procedure, such as document fees; the pulling of a credit report on the new debtor; and taxes.

Usages

A novation is sometimes used when a debtor is having difficulties repaying a secured loan and the lender chooses not to foreclose and seize the property. A novation most commonly takes place when a borrower transfers the entire debt to a co-signer on the original loan and is then released from any responsibility for repayment. Most lenders, however, demand that any new borrower qualify for and refinance the loan at current interest rates, rather than simply taking over payments on the old terms. The bank enforces lending guidelines and generates fees through the loan qualification process.

Assumption and Novation

Novation is distinct from assumption, in which a second party takes over payments but the original borrower remains responsible for repayment in case of default. Some forms of assumption also expect the original borrower to make up any shortfall if the property is sold on foreclosure for less than the outstanding loan amount.

Loan Agreements

Novation can also refer to the substituting of a new loan agreement for an old one that has become unworkable for the borrower. The repayment schedule may be extended, or a grace period may be allowed in which interest-only payments are made and the principal balance remains constant. Lenders don't normally offer novation unless a borrower specifically requests it. The terms of a novation may include any assumption charges that were part of the original loan agreement.

Don't Miss

Filter:
  • All types
  • Articles
  • Slideshows
  • Videos
Sort:
  • Most relevant
  • Most popular
  • Most recent

No articles available

No slideshows available

No videos available

By using the eHow.co.uk site, you consent to the use of cookies. For more information, please see our Cookie policy.