Loan Modification
A permanent change to the original terms of a loan agreed upon by the lender and borrower to prevent default.
What is Loan Modification?
A loan modification is a permanent change to one or more terms of an existing loan agreement, negotiated between a lender and a borrower who is experiencing or at risk of financial hardship. Modifications can involve reducing the interest rate, extending the loan term, changing the loan type (e.g., from adjustable to fixed rate), deferring a portion of the principal balance, or reducing the outstanding balance in cases of severe distress. Unlike forbearance—which temporarily suspends payments—a loan modification restructures the loan permanently to make ongoing payments more affordable. Loan modifications are most common in mortgage lending; the federal Home Affordable Modification Program (HAMP), active from 2009 to 2016, assisted over 1.8 million homeowners in avoiding foreclosure through standardized modification protocols.
Example
A homeowner with a $1,800 monthly mortgage payment at 7.5% interest is struggling after a job change. Their servicer approves a loan modification that lowers the interest rate to 5.5% and extends the remaining term by five years, reducing the monthly payment to $1,450 — enabling the homeowner to stay current without foreclosure.
Source: Consumer Financial Protection Bureau — Loan Modification