A novation fee is what you pay when one party in an existing contract is swapped out for a new one and the original agreement is replaced with a rebuilt version signed by all three parties. The amount depends entirely on what’s being novated: an FHA mortgage assumption is capped at $1,800, a commercial real estate loan assumption typically runs about 1% of the outstanding balance, and a residential lease transfer often costs somewhere between $200 and $500. The fee covers vetting the incoming party and redrafting the contract so the party that stays isn’t absorbing extra risk.
What You’re Actually Paying For
Novation ends the original contract and creates a new one in its place. The outgoing party walks away free of further obligations, the incoming party takes on both the rights and the duties, and the party that stays agrees to the whole arrangement. All three have to consent. That unanimous sign-off is the defining feature of a novation.1Cornell Law Institute. Novation
This is different from an assignment. An assignment transfers your rights to someone else, but you stay on the hook for your obligations, and the other party only has to be notified. Novation transfers both rights and obligations, which is why everyone has to agree and why the paperwork is heavier. The fee pays for that heavier paperwork, plus the credit, financial, or operational review the remaining party runs on whoever is stepping in.
Typical Novation Fee Amounts
The label changes by industry — assumption fee, transfer fee, processing fee — but it’s the same transaction underneath.
Mortgage Assumptions
This is the most common setting. When you assume someone else’s mortgage, the lender has to underwrite you, update its records, and issue new loan documents. For FHA-insured loans, the maximum processing fee is $1,800, a ceiling HUD doubled from $900 in 2024.2U.S. Department of Housing and Urban Development. FHA INFO 2024-30 VA loan assumptions carry a separate funding fee of 0.5% of the remaining loan balance, paid to the Department of Veterans Affairs. On a $300,000 balance, that’s $1,500, and unlike funding fees on new VA purchase loans, you generally cannot roll this one into the loan. It’s due in cash at closing.
Commercial Real Estate and SBA Loans
Commercial mortgage-backed securities (CMBS) loans are often assumable because the alternative, prepaying, triggers heavy yield-maintenance penalties. CMBS assumption fees typically run about 1% of the outstanding loan balance, though borrowers sometimes negotiate down to 0.5%. On a $5 million loan that’s $25,000 to $50,000 before legal costs. SBA-backed commercial loans follow a similar pattern, with assumption fees commonly set at $1,000 or 1% of outstanding principal depending on the lender.
Residential and Commercial Leases
When a tenant wants to transfer a lease, the landlord or management company typically charges a flat fee. Residential transfer fees commonly fall in the $200 to $500 range. Commercial lease novations cost more because the vetting is heavier: a landlord replacing a restaurant tenant on a ten-year lease has to evaluate the incoming business’s financials, insurance, and operational history.
Government Contracts
Federal law generally prohibits transferring a government contract from one contractor to another. When a contractor sells its assets or merges with another company, the government may recognize the buyer as the successor through a formal novation agreement.3Acquisition.GOV. FAR 42.1204 – Applicability of Novation Agreements The government doesn’t charge a fee for this, but the legal cost of assembling the required documentation package falls on the contractor and can be significant.
Derivatives
In the derivatives market, novation happens when one party to a swap is replaced by a new counterparty. The International Swaps and Derivatives Association provides a standardized process through its Novation Protocol, and adhering to the protocol itself is free.4International Swaps and Derivatives Association. ISDA Novation Protocol Parties still carry their own legal and operational costs, especially for bespoke instruments.
Flat Fee or Percentage
Novation fees generally follow one of two structures. Flat fees are standard for routine, lower-value transactions: residential lease transfers, personal loan assumptions, and straightforward contract substitutions. FHA’s $1,800 cap is a useful benchmark for what regulators consider reasonable processing on a residential mortgage assumption.2U.S. Department of Housing and Urban Development. FHA INFO 2024-30
Percentage-based fees show up in larger deals where the facilitator’s work and risk scale with the deal size. CMBS loan assumptions at 1% of the loan balance are the clearest example. Due diligence on a $20 million loan is genuinely heavier than on a $2 million one, with more financials to review and more exposure for the servicer if something slips.
Then there are the costs around the fee. Notary charges run from a few dollars to around $25 per signature depending on the state. County recording fees for updated deeds or amended agreements typically land somewhere between $10 and $80 or more. Attorney review or drafting of the novation agreement is its own line item, and in commercial deals each side usually hires its own counsel.
Who Pays
Payment responsibility is almost always negotiable, and where the fee ends up says a lot about who has leverage.
The outgoing party tends to pay when they’re the one who wants out. A tenant breaking a lease early and asking the landlord to accept a replacement is normally expected to cover the transfer fee. A contractor selling its business bears the legal costs of the government novation package.5Acquisition.GOV. FAR Subpart 42.12 – Novation and Change-of-Name Agreements
The incoming party pays when what they’re assuming is worth it. Taking over a mortgage at 3% in a 7% market is worth a processing fee. So is stepping into a below-market commercial lease in a strong location. In both cases the assumption fee is small next to the economic value of the contract being inherited.
Splitting the fee is more common than people expect, especially when both sides benefit. A lease novation where the tenant wants out and the landlord actually prefers the replacement tenant’s credit is a natural case for sharing costs. Propose a split if it fits; just put the allocation in writing before any money changes hands.
What the Fee Buys
The remaining party — the lender, landlord, or counterparty staying in the deal — needs to protect itself, and that’s what the fee funds. For a mortgage assumption, the lender runs a full credit evaluation on the incoming borrower: income verification, debt-to-income ratios, credit history, and employment records. It’s an abbreviated version of the original underwriting.
For a government contract novation, the contracting officer evaluates the transferee’s ability to perform, reviews audited financial statements, and obtains legal opinions confirming the transfer was executed properly under applicable law.3Acquisition.GOV. FAR 42.1204 – Applicability of Novation Agreements In financial services, vetting also includes sanctions screening and anti-money-laundering checks on the incoming party.
Documents to Have Ready
Having the paperwork organized up front is the single most effective way to keep novation costs down. Delay in the vetting process translates straight into billable hours.
- The original contract, with every amendment, rider, and schedule attached.
- Identity and financial information for all three parties: legal names, tax IDs, and contact details for the outgoing, incoming, and remaining parties.
- Evidence that the incoming party can perform: financial statements, credit reports, proof of insurance, or professional qualifications depending on the contract.
- The novation agreement itself, sometimes called a deed of novation, recording all three parties’ consent. Institutions often provide templates; commercial deals usually need custom drafting.
- Surety or bond documentation if the original contract is backed by a performance or payment bond. The surety has to consent separately, and a new bond in the incoming party’s name may be required.
For mortgage assumptions specifically, the incoming borrower should expect to produce the same financial documentation required for a new loan application.
Consumer Protections and Negotiation
If a novation fee is charged as part of a consumer credit transaction, federal rules may reach it. Under the Truth in Lending Act, any charge imposed as a condition of extending credit counts as part of the finance charge and must be disclosed.6Consumer Financial Protection Bureau. Regulation 1026.4 – Finance Charge When a lender-approved mortgage assumption happens on a federally related mortgage loan, RESPA’s disclosure and settlement procedure requirements apply to that transaction.7Consumer Financial Protection Bureau. Regulation 1024.5 – Coverage of RESPA
The practical point: if a fee looks unreasonably high or wasn’t disclosed before closing, you have grounds to push back. FHA and VA caps exist for a reason. Outside federally regulated loan programs, novation fees in commercial and lease settings are largely a matter of contract, so the real protection is negotiating the fee and the allocation before you sign.