The pressing need to develop eco‐friendly polymer materials for building applications has led to increased interest in modifying existing polymer systems. In this study, a sustainable approach to augmenting urea‐formaldehyde (UF) resins, widely employed in wood‐based panels is introduced. Addressing this, formaldehyde‐scavenger demethylated lignin nanoparticles into UF resins, aiming to produce a green and enhanced medium‐density‐fiberboard (MDF) with minimal formaldehyde emissions is incorporated. The results indicate that increasing concentrations of demethylated lignin nanoparticles in the UF adhesive, there is not only a reduction in formaldehyde emissions from MDF composites but also a significant decrease in thickness swelling. The highest reduction in formaldehyde emission is observed in the MDF composite prepared with UF resin containing 7% lignin nanoparticles (UF‐7NL), with an emission of 2.9 mg/100 g, marking a substantial decrease of 74% compared to emission of 11.2 mg/100 g from neat resin. Importantly, this reduction does not compromise physical and mechanical properties of the MDF; they remain comparable to boards bonded with unmodified UF. Molecular modeling revealed that lignin effectively traps formaldehyde, incorporating it as ‐CH2OH groups, leading to a notable decrease in formaldehyde emission from MDF. This approach offers an eco‐friendly modification to a common polymer, showcasing lignin nanoparticles as innovative additives.