Novation

Novation is the substitution of a new contract, obligation, or party in place of an old one, with the consent of all parties involved, such that the original obligation is extinguished and replaced. In the note world, novation comes up when the terms of a loan are fundamentally rewritten or when a new borrower formally takes over the debt — and it is important to distinguish it from a simple assignment, which transfers a note without changing the underlying obligation.

Novation vs. assignment

This distinction matters when you sell a note:

• Assignment transfers the holder's rights to a new owner. The borrower's obligation is unchanged; only who collects changes. Selling your note to a note buyer is an assignment — the borrower keeps owing the same debt on the same terms, just to a new payee.
• Novation creates a new agreement that replaces the old one. It typically requires everyone's consent (lender, original borrower, and any new borrower). The original obligation is discharged and a new one stands in its place.

Because an ordinary note sale is an assignment, the borrower's consent is generally not required to sell your note — a point that surprises some sellers. Novation, by contrast, cannot happen unilaterally.

Where novation appears in note deals

• Borrower substitution: If a new buyer is to formally assume the loan and release the original borrower from liability, that is a novation — the lender agrees to swap borrowers. (Contrast this with a property transferred "subject-to," where the original borrower often remains liable and the due-on-sale clause may be implicated.)
• Major restructuring: A loan modification so sweeping that it replaces the original note entirely can function as a novation. Most modifications are not novations — they amend the existing note rather than replace it — but the line matters for the chain of title and for which document controls.
• Refinance: When a borrower refinances and pays off your note, that is effectively a new loan replacing the old; your note is satisfied and released.

Why it matters when you sell

A buyer underwriting your note wants to know which obligation is actually in force. If the note was novated, the operative terms are in the new agreement, and the documentation chain must reflect that cleanly. Undocumented or ambiguous restructurings create risk and can lower price. If your note has ever been formally restructured or had the borrower changed, disclose it and provide the governing documents, so the buyer can confirm exactly what they are purchasing.

This is general information, not legal advice; whether a change is a modification or a novation is a fact- and state-specific legal question.