What is a loan modification?

A loan modification refers specifically to a restructuring of a loan's terms, which can involve changes such as adjusting the interest rate, extending the loan term, or altering the payment schedule to make it more manageable for the borrower. This process is often initiated when a borrower is experiencing financial hardship and seeks to avoid defaulting on the loan.

By modifying the terms, lenders aim to create a more sustainable payment plan that allows the borrower to continue making payments, thus reducing the risk of foreclosure. Unlike refinancing, which typically involves taking out a new loan to pay off the old one, a loan modification works within the existing loan framework to adjust the terms directly.

The other options do not accurately describe what a loan modification entails: increasing the loan amount is related to a different scenario, such as a loan extension or additional borrowing; government grants do not pertain to loans but rather to need-based financial assistance; and while a refinancing option involves changing the structure of a loan, it is distinct from a loan modification in that it typically creates a new loan rather than amending the existing one.