A loan modification is a permanent change to the terms of a loan, according to the U.S. Department of Housing and Urban Development. A loan modification reinstates a loan and offers a repayment option the borrower can afford.
As of 2014, a borrower can apply for and potentially receive a loan modification only once in a two-year period, according to the U.S. Department of Housing and Urban Development. Several factors affect a borrower's eligibility for a loan modification. For example, the criteria evaluates loss of income, increase in living expenses and ability to successfully complete a trial payment program authorized by the lender, according to the U.S. Department of Housing and Urban Development. Continuous income, which can include a borrower's wages, self-employment earnings, disability or veteran benefits, child support, social security benefits, and pensions, is also evaluated.
When applying for a loan modification, the interest rate may be renegotiated based on what the borrower can afford, and closing fees or lender charges may be charged to the borrower. These fees can be wrapped into the principal of the loan, depending on the lender's policies. Many times, when a borrower qualifies for a loan modification, any late fees accrued may be waived.