Loan To Cost vs Loan To Value & PMI

[Matthew O'Dell]

I am in the process of purchasing my first investment property. While talking to my lender I am trying to understand the difference of the LTC vs. LTV in regards to my down-payment and PMI.

I am told that my down-payment need to be a percentage of the purchase price not of the value of the home to avoid PMI. I feel like I understand with a refinance why having 20% LTV will eliminate PMI but why doesn't LTV matter in the initial purchase?

I feel that if I pay 295 for the home and the appraisal comes back at 330 that putting 31k should eliminate the PMI. That would leave the loan at 80% LTV. Instead, I have to put 59k on a 295 purchase no matter the appraised value.

What am I missing? Is that right or should I look at a different lender?

[Caroline Gerardo]

Appraisal is only an opinion. The risk is based on the most conservative viewpoint.

It is HIGHLY likely that the appraiser randomly assigned will not appraise subject higher IF you have unrelated buyer and seller. Appraiser won't use cash sales. Comparables are closed sales in past 3 months similar square footage, room count, in tract, and condition... FHFA/Fannie/Freddie make the rules (our government not lenders) Lenders do not make more money on mortgage insurance (that is a separate company). Lenders don't make more money on higher loan to value loans, these are higher risk of default.   

No conventional, FHA, VA, USDA (government backed) loan will do what you want.

However, hard money lenders would look at the appraisal and meet you half way, but far more expensive.

You didn't ask: do I think there is bias in appraisals. Answer: yes. Confirmation bias distorts the loan to value, long term risk, and the current system of real estate contracts limits opportunity for buyers to renegotiate during the process. 

Hope this helps understand the big picture :)