Conventional Loan PMI Calculation Rules for Appraised Value and Price

The Quick Read: On a purchase, the lender measures your loan against the lower of the sales price or the appraised value. That one number sets your loan-to-value ratio (LTV), and LTV decides whether you need private mortgage insurance (PMI) and which cost bracket you land in. A high appraisal does not help you on a purchase. A low one can hurt you.

Which Value Does the Lender Use on a Purchase?

The lender uses the lower of the sales price or the appraised value. Divide the loan amount by that value and you have the LTV. This is how Fannie Mae’s guide frames it, and Freddie Mac’s Seller/Servicer Guide also requires mortgage insurance on loans above 80% LTV. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

The formula is plain:

LTV = loan amount ÷ the lower of (sales price, appraised value)

Why the lower number? The house is the collateral. If you agree to pay more than an independent appraiser says it is worth, the lender will not lend against the extra. The investor who buys the loan wants the same protection. So the lender sizes the risk to the value the property can support.

That is why the appraisal does not need to “come in high” to help you. If it matches or beats the price, the price is used and your math stays as planned. If it comes in under the price, the appraisal replaces the price and your LTV rises.

Step by Step: How the Number Gets Built

Here is the sequence on a typical purchase file.

1. Contract price. This is what you and the seller agreed to pay.

2. Appraisal. An independent appraiser reports the value. The underwriter compares it to the price.

3. Concession adjustment. Sales concessions are deducted from the price first. Per Fannie Mae’s rules on interested-party contributions, the lower of the reduced price or the appraisal is then used for LTV.

4. Value selection. The lower figure becomes the denominator.

5. LTV and bracket. Your loan amount divided by that value gives the LTV. The insurance level follows the LTV after any concession adjustment.

6. Credit score pricing. Your credit score and the LTV bracket together drive the cost of mortgage insurance. Published typical annual premiums run 0.58% to 1.86% of the balance. That is a range for context, never a quote.

7. Closing disclosures. Your Loan Estimate and Closing Disclosure show the insurance as it applies to your file.

Across the wholesale programs Lendmire places purchase files with, this is the order the underwriter works in. The standard first-time buyer envelope allows 97% LTV on a one-unit principal residence with a fixed rate. Other purchases generally top out at 95%. Both sit well above 80%, so mortgage insurance is part of most low-down-payment files.

Three Scenarios Side by Side

These use percentages of price only, so the pattern is easy to see. Assume a loan at 90% of the sales price in the first three rows. The last row uses a smaller loan to show a threshold crossing.

The last row is the one that surprises people. A buyer planning to put 22% down expects no PMI. A modest low appraisal pushes the ratio just over 80%. PMI applies even though the plan looked clean on paper. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

One more wrinkle: Freddie Mac rounds its calculated ratio up to the next whole number for its maximum-LTV tests. A ratio that barely clears a line can land on the wrong side of it. Ask your loan officer which way your file rounds.

What Happens When the Appraisal Comes In Low?

You have four practical paths, and each changes the math differently.

• Renegotiate the price. If the seller drops to the appraised value, your LTV returns to plan. Sellers often agree because the next buyer faces the same appraisal.
• Bring more cash. You cover the gap. Your effective down payment against the appraised value gets larger, and LTV falls back toward the target.
• Accept the higher LTV. You keep the price and loan structure as is. Your bracket rises, and PMI may start or cost more. This works only if the file still fits the program’s leverage limits.
• Challenge or walk. You can ask for a review if the appraisal missed comparable sales. Your contract may also give you a way out. Talk through that before the appraisal comes back.

Seller credits matter here too. Credits inside the program’s concession limits do not lower the value used. Anything above the limits is deducted from the price, which can drop the value and raise the LTV.

Your agent can help with the negotiation. Your loan officer can show you the revised bracket before you decide.

What Does a High Appraisal Actually Do?

On a purchase, not much. The price is the cap, so a high appraisal leaves your LTV where it started. Online sources often say a high appraisal “helps” or “removes” PMI. That is only true in specific situations: a refinance, a new valuation after you own the home, or a state rule discussed below.

Three myths are worth clearing up.

• “PMI is based on what I paid.” Close, but on a purchase it is the lower of what you paid or the appraisal.
• “A higher appraisal lowers my LTV.” Not unless the price also moves.
• “PMI drops off when my home rises in value.” Not automatically, as the cancellation section explains.

How Refinances Differ

A refinance has no sales price. The value comes from an appraisal, an automated valuation, or another method the investor accepts. The new loan’s LTV and the need for mortgage insurance follow that value.

This matters for the PMI question. If your home has risen in value, a refinance measures the new loan against today’s number. Lendmire’s piece Refinance Appraisal Rules for Ending PMI After Your Value Rose walks through that route. Rate-and-term refinances on a one-unit principal residence reach 95% LTV, with mortgage insurance above 80%. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Which Value Governs Which Question?

Here is the part most explainers blur. Different questions use different values.

“Original value” is the same idea as the purchase test: the lower of price or appraisal when you bought. For a refinance, the new appraisal resets it.

When Does PMI Come Off?

On a standard schedule, you may request cancellation when your balance is first scheduled to reach 80% of the original value. You need a good payment history, no subordinate liens and no decline in value. The servicer must end it automatically when the balance is first scheduled to reach 78%. That timeline comes from the Homeowners Protection Act, as laid out in the CFPB’s examination procedures.

Two details matter. First, those dates rest on the original value and the amortization schedule, so a later price rise does not speed them up. Second, “high-risk” loans fall outside the 80% and 78% rules. They face only a final termination date.

If your home has gained value, there is another door: cancellation based on current value. Under Fannie Mae’s Servicing Guide, this works only if you ask. Servicers do not solicit these requests. The terms ease with longer ownership: on a one-unit principal residence or second home, the LTV limit is 75% at two to five years of seasoning and 80% after five years. Two-to-four unit homes and investment properties face a tighter limit of 70% and more than two years of seasoning.

• Value-adding improvements can waive the two-year seasoning, with an 80% limit. Maintenance repairs do not count.
• The servicer will check that today’s value is not below the original.
• Freddie Mac’s current-value rules differ in places, so find out which investor owns your loan before paying for a new valuation.

Where the General Rule Breaks

The lower-of rule is the norm. These exceptions are worth knowing.

• New York. For non-co-op properties, Fannie Mae and Freddie Mac both let the lender decide on mortgage insurance using the appraised value alone. If the price is above the appraisal, that may mean no insurance on a loan that would otherwise need it. A carve-out exists for loans at lower LTVs.
• Affordable LTV options. For shared equity deals and Community Seconds with a subsidized sales price, Fannie Mae’s underwriting system uses the appraised value alone on purchases. It applies only to principal residences.
• Seller concessions. Excess concessions reduce the price used. The limits vary by LTV band and occupancy.
• Manufactured homes. Freddie Mac revised the value basis for certain builder-sold manufactured home purchases in subdivisions. It is a different value basis for certain purchases, so ask your loan officer if this applies.
• Reduced-coverage programs. HomeReady and Home Possible reduce mortgage insurance coverage for qualifying borrowers. Both carry an income limit of 80% of area median income.
• Occupancy. Second homes reach 90% LTV. Investment property reaches 85% on one unit and 75% on two to four units. Occupancy changes the leverage before value ever comes into play. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

Coverage level also matters. Fannie Mae offers standard and minimum coverage on some transactions, and a lender that picks less than standard coverage pays an added adjustment. That shows up in your pricing, not in the value calculation.

What Your Decision Looks Like in Practice

Think of it as three checkpoints.

Before you make an offer. Pick your target down payment as a percentage. Ask what LTV and bracket it produces. Know where 80% sits for you, because that line decides whether PMI starts at all.

When the appraisal lands. Compare it to your price. If it is at or above the price, nothing changes. If it is below, run the revised LTV and decide among the four paths above.

After you close. Your closing paperwork shows projected cancellation dates. Track them. If your value has risen, ask your servicer for its current-value rules before ordering anything.

Questions worth asking your lender:

• Which value is being used for my LTV, and why?
• What happens to my bracket if the appraisal is lower?
• Which investor owns the loan, so I know the removal rules?
• What is my original value on record?
• How do I submit a cancellation request?

Credit and ratios matter alongside value. The wholesale conventional programs start at a 620 decision score. The automated finding governs most files, with a total ratio ceiling of 50%. Everything here is subject to lender guidelines and a full file review.

If you are buying a home and want to see whether a conventional loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Details on conventional loan programs are on the program page, and every figure here is subject to lender guidelines and is not a commitment to lend.

Key Terms Defined

Loan-to-value (LTV): The loan amount divided by the property’s value, shown as a percentage.

Private mortgage insurance (PMI): Insurance you pay on a conventional loan above 80% LTV that protects the lender if you default. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

Original value: The lower of price or appraisal at purchase, or the appraised value at a refinance, used for the 80% and 78% cancellation dates.

Sales concession: A seller-paid cost that is treated as a price reduction when it exceeds the program’s limits.

Seasoning: The length of time you have owned the home, which matters for current-value PMI cancellation.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B7-1-01: Provision of Mortgage Insurance

2. Freddie Mac Guide Section 4701.1

3. Fannie Mae Selling Guide B3-4.1-02: Interested Party Contributions

4. CFPB Homeowners Protection Act Examination Procedures

5. Fannie Mae Servicing Guide B-8.1-04: Termination of Conventional Mortgage Insurance