Stop making payments on your home, and it’s almost certain the lender will foreclose, which will negatively affect your credit score in a big way.

A good credit score can affect everything from your ability to borrow to the amount you pay for insurance to your eligibility to work some jobs.

But as more people default on their homes, either because of economic conditions or a strategic decision to walk away, more are faced with deteriorating credit, and it just might change the lending landscape of the future.

Nationally, 15.02 percent of home loans in the fourth quarter of 2009 were in foreclosure or some stage of delinquency, according to a report released Friday by the Mortgage Bankers Association. The number is the highest ever, the association said.

A foreclosure isn’t the worst thing to affect your credit score, and you could be eligible to take out a new home loan sooner than you think.

“Really, a bankruptcy is considered the absolute worst, because it affects all your debt,” said Susan Henson, a spokeswoman for Experian, one of the nation’s big three credit reporting bureaus. “A (foreclosure) is confined to one item on your credit report.”

In other words, default on a home loan and the lender is likely to report the matter as a foreclosure. Your credit score will drop 100 to 200 points and the reported foreclosure — the word “foreclosure” actually shows on your credit report — will remain on your credit report for the next seven years, Henson said.

But in most cases, it shows up as only one negative item, as it typically affects only one credit account: your mortgage.

A bankruptcy will trigger a similar point drop but stays on your credit report longer.

In Chapter 7 bankruptcy, which liquidates debt and thus shows negative reports for multiple credit accounts, the filing stays on your credit report for 10 years.

A Chapter 13 bankruptcy, which allows an individual to dismiss some debt if the individual successfully completes a multiyear repayment of some of the debt based on his or her income, typically stays on a credit report for seven years, though it can be listed for 10, said Maureen Thompson, the Arlington, Va.-based legislative director for the National Association of Consumer Bankruptcy Attorneys.

Short sales

A short sale also can negatively affect a homeowner’s credit score, though it’s typically not the actual sale but the circumstances that lead to it.

A short sale refers to the sale of a home for less than the amount owed on it, in which the lender agrees to take a loss, typically to avoid taking ownership of the property through foreclosure.

If a borrower misses loan payments prior to the sale, those will negatively show as delinquent payments on a credit report, said Dave Lewis, a loan consultant with the Bend office of Bank of Oregon, a mortgage firm owned and operated by Willamette Valley Bank.

But it is possible to negotiate a short sale without missing loan payments, thereby preserving your credit, Lewis said.

“The problem is most people going into a short sale stop making payments to get (the bank’s) attention, so by the time they get to a short sale, they’ve already trashed their credit,” Lewis said.

“But it is possible to do it right, if you work with the pros,” Lewis said, referring to attorneys who have experience negotiating short sales with banks.

Borrowing again

With either a foreclosure or bankruptcy, how much someone’s credit score drops is dependent on a number of factors, including past credit history, the number of open credit accounts and the amount of debt you’ve accrued, said Craig Watts, a spokesman for Fair Isaac Corp., the private firm that developed the FICO credit score used by Experian, Equifax and TransUnion.

That same credit history also dictates how soon you will be able to borrow again. In some cases, it can be as soon as three years, said Casey Jones, a loan officer and the branch manager of Academy Mortgage Corp. in Bend.

“It really depends on the type of loan you want to do … but a borrower is eligible for a FHA loan if they haven’t had a foreclosure in the past three years and have re-established credit,” Jones said.

An FHA loan is a home loan guaranteed by the Federal Housing Administration.

Jones said other scenarios, such as serious illness or the death of a wage earner, could reduce the time requirement further.

A credit score is not the only thing a lender considers when offering a loan, but it is the most predictive of future behavior, Watts said.

Watts said that nationally, the historical range of credit scores has held up during the recession. There are more people whose scores have deteriorated due to foreclosure or unemployment, but many people’s scores have improved as they’ve put greater emphasis on paying down debt or refrained from taking on new debt.

Regan Scott is the principal broker of Deschutes Property Management in Bend and oversees roughly 750 rental units, primarily single-family residences, in Central Oregon. Scott said he has seen a marked increase in the number of prospective renters with poor credit scores that have been impacted by foreclosures or bankruptcies.

Unlike in years past, that doesn’t mean they are turned away, he said.

“We have to respond to a changing market,” Scott said. “With so many people upside down and underwater, many people are electing to walk away, and unfortunately, some very good people are walking away, people that have maintained good scores but are upside down in their house and saying enough is enough. Conversely, they make excellent tenants because we know they aren’t going to be buying a house anytime soon.”

A mortgage industry foundation shaken

Where does all this lead? Perhaps to major changes in the mortgage industry, many say.

Earlier this month, TransUnion, one of the nation’s three big credit reporting bureaus, released a study indicating that the number of people who are current on their credit card payments but delinquent on their mortgage payments rose again in the third quarter of 2009.

The number rose to 6.6 percent, from 4.3 percent in the first quarter of 2008.

According to the report, the increase is striking.

“Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages,” Sean Reardon, the study’s author, said in a statement accompanying the report.

But as the study shows, more people are choosing to pay their credit card bills before their mortgages, preferring to preserve their access to capital as opposed to sacrificing everything to keep their house.

“That is really significant,” said University of Oregon economist Timothy Duy. “The whole mortgage industry is based on the expectation that you will pay a mortgage before all other obligations. That is turning the foundation of the business model upside down.”

That could mean higher mortgage interest rates in the future, particularly in light of the increasing number of strategic defaults, said Bill Anderson, president and CEO of Bend-based Mid-Oregon Credit Union.

“Is it a moral decision or is it a pure business decision?” Anderson asked about people with the capacity to pay but who purposely default because the home’s value is less than what is owed on it.

“Part of the reason homeownership has been affordable at all compared to consumer loans is the belief from lenders that people don’t walk away from their home,” Anderson said.

In a report posted Thursday on the financial news Web site CNBC, Greg McBride, the senior financial analyst for Bankrate.com, estimated that 25 percent of the mortgage defaults nationally are “strategic,” adding that “that’s not a small number.”

Anderson acknowledges that it might be hard for lenders to turn away the increasing number of potential customers who might have foreclosures on their credit reports. But as a lender, he said, it’s not without risk, adding that character “should have some impact” on a lending decision.

“Can a lender afford to take the risk on lending to someone who has demonstrated they don’t have the character to repay a loan?” Anderson said. “It’s a tough situation. … Nationally, it’s quite a debate.”

Duy, the economist, wonders whether lenders will have to reconsider their underwriting standards in the future, mostly because they can’t afford to turn away thousands of potential customers who have credit scores negatively impacted by a foreclosure.

“I don’t think it’s unreasonable to expect that to happen only because once you eliminate so many potential borrowers, who are you are going to lend to?” Duy said.