The lovastatin hydrolase PcEST from the fungus Penicillium chrysogenum exhibits enormous potential for industrial-scale applications in single-step production of monacolin J, the key precursor for synthesis of the cholesterol-lowering drug simvastatin. This enzyme specifically and efficiently catalyzes the conversion of lovastatin to monacolin J but cannot hydrolyze simvastatin. Understanding the catalytic mechanism and the structure–function relationship of PcEST is therefore important for further lovastatin hydrolase screening, engineering, and commercial applications. Here, we solved four X-ray crystal structures, including apo PcEST (2.3 Å), PcEST in complex with monacolin J (2.48 Å), PcEST complexed with the substrate analog simvastatin (2.4 Å), and an inactivated PcEST variant (S57A) with the lovastatin substrate (2.3 Å). Structure-based biochemical analyses and mutagenesis assays revealed that the Ser57 (nucleophile)–Tyr170 (general base)–Lys60 (general acid) catalytic triad, the hydrogen-bond network (Trp344 and Tyr127) around the active site, and the specific substrate-binding tunnel together determine efficient and specific lovastatin hydrolysis by PcEST. Moreover, steric effects on nucleophilic attack caused by the 2′,2-dimethybutyryl group of simvastatin resulted in no activity of PcEST on simvastatin. On the basis of structural comparisons, we propose several indicators to define lovastatin esterases. Furthermore, using structure-guided enzyme engineering, we developed a PcEST variant, D106A, having improved solubility and thermostability, suggesting a promising application of this variant in industrial processes. To our knowledge, this is the first report describing the mechanism and structure–function relationship of lovastatin hydrolase and providing insights that may guide rapid screening and engineering of additional lovastatin esterase variants.