Loan modification is a process of restructuring a loan, used by borrowers to reduce their debt payments by changing the terms of the existing loan. This can include changing the amount owed, interest rate, or length of repayment. Loan modification helps borrowers stay in their homes when they might otherwise face foreclosure due to inability to keep up with the original payments.

In most cases of loan modification, a lender will agree to restructure a loan in order to help a borrower. The terms of a loan modification differ depending upon the particular situation of the borrower, though the end goal is usually a reduction in monthly payments. A borrower may modify a mortgage, home equity loan, auto loan and other types of loans.

For a loan modification, borrowers must demonstrate an inability to make the payments under the terms of the original contract, usually due to financial hardship. A successful loan modification may result in an extension of the loan’s term, the forging of a new payment agreement over a set period, or a reduction in the interest rate. Some loan modification programs require the borrower to set aside a portion of each month’s payment in an escrow account as additional assurance of repayment.

Though terms may differ, few loan modifications reduce the total amount that must be paid back. In some cases, a loan may even be fully forgiven, though this is less common.

Some consumers have access to government programs that help mortgage-holders. Loan modifications through these programs often reduce overall principal (but not principal payments) and the interest rate locked in, so the amount of principal remaining is reduced over the life of the loan. Borrowers of federally backed loans, such as those owned or guaranteed by Fannie Mae and Freddie Mac, have access to specific loan modification programs.

In many cases, applicants seek help from legal or other professional counsel when negotiating and submitting a loan modification. Due to the complex process, many borrowers require advice to navigate the negotiations and paperwork associated with applying for a loan modification.

The decision to pursue a loan modification is one that should not be taken lightly, as approval of loan modification is rarely guaranteed. However, for those facing financial hardship, loan modification may be the best option for preventing potential credit damage and possibly saving their home.