What the lender is really measuring
Every up-front loan cost and ratio in this unit answers one question: how much of the lender's money is at risk against this property. That is why the numbers are tied to the loan and to the property's value, not to whatever the buyer agreed to pay.
Discount points
One discount point equals 1% of the loan amount, never of the sales price. That swap is the classic trap. On a $340,000 house with a $320,000 loan, 2 points cost $320,000 × 0.02 = $6,400. Taking 2% of the $340,000 price gives $6,800, which is wrong; one point alone is $3,200; and using 0.2% gives $640. As a rule of thumb, each point raises the lender's yield about 1/8 of 1%.
Loan-to-value
On a purchase, LTV = loan ÷ the lower of sales price or appraised value. Never the higher one. Price $400,000, appraisal $390,000, loan $312,000: $312,000 ÷ $390,000 = 80%. Dividing by $400,000 gives 78%, the most common error. The buyer must bring $88,000, covering the $10,000 appraisal gap plus the down payment, and at exactly 80% LTV no private mortgage insurance is required.
Private mortgage insurance
PMI is paid by the borrower but protects the lender against loss if the borrower defaults. It is generally required on conventional loans when LTV exceeds 80%. It does not insure the borrower's payment against job loss, and it does not guarantee equity if values fall. FHA loans carry MIP and VA loans carry a funding fee instead, with no monthly mortgage insurance on VA at all.
Cancelling PMI
Under the Homeowners Protection Act the borrower may request cancellation in writing at 80% of original value, and automatic termination happens when the balance is first scheduled to reach 78% of original value. Original value is the lesser of price or appraised value. Price $310,000, appraisal $300,000: automatic termination at 0.78 × $300,000 = $234,000, not $241,800.