VA Loan vs. Conventional Loan: Cost Comparison

A VA loan is typically cheaper than a conventional loan for eligible borrowers who plan to stay in the home longer than about four years, mainly because it eliminates private mortgage insurance (PMI) in exchange for a one-time funding fee. On a $400,000 home, an eligible borrower with 0% down pays an $8,600 VA funding fee upfront but avoids PMI entirely, while a conventional borrower with 3% down (a $12,000 down payment) typically pays $100 to $200 a month in PMI until the loan reaches 80% loan-to-value (LTV).

Quick Answer:

• Down payment: VA allows 0% down for eligible borrowers; conventional allows as low as 3% down (97% LTV).
• PMI: VA loans never require PMI. Conventional loans below 20% down typically carry $100 to $200 a month in PMI until the loan reaches 80% LTV.
• Funding fee: VA charges 2.15% of the loan amount on first use, 3.3% on subsequent use; it is waived for borrowers with a qualifying VA disability rating.
• Rate: According to HMDA 2024 data, VA rates typically run 0.25% to 0.50% below conventional rates.
• Break-even: on a $400,000 loan, the VA funding fee is typically recovered in about four years of avoided PMI, after which the VA loan is the cheaper option.

VA Loan vs. Conventional Loan: Full Comparison Table

Figures below assume a $400,000 loan amount for consistency across the comparison. All figures are illustrative examples only.

	VA Loan	Conventional Loan
Minimum down payment	0% for eligible borrowers	3% ($12,000 on $400,000)
PMI	Never required	Typically $100-200/month below 20% down
Funding fee	2.15% first use ($8,600); 3.3% subsequent use ($13,200); waived with qualifying disability rating	None
Interest rates	Typically lower than conventional	Typically higher than VA
Debt-to-income (DTI) flexibility	Residual income used alongside DTI, generally more flexible	Hard cap typically 45-50%
Loan limit	No cap for borrowers with full entitlement	$832,750 baseline in most areas (FHFA, 2026)
Origination fee (Tomo Mortgage)	$0	$0

Down Payment: 0% vs. 3% Minimum

VA loans allow eligible borrowers to finance 100% of the purchase price. Conventional loans require a minimum of 3% down under standard 97% LTV programs. On a $400,000 home, that 3% minimum equals $12,000 out of pocket before closing costs, money a VA-eligible borrower does not need to have on hand at all.

Insurance Costs: What Does a VA Loan Cover

Conventional loans with less than 20% down require PMI , which protects the lender, not the borrower, against default. PMI typically runs $100 to $200 a month, or roughly $1,200 to $2,400 a year, depending on credit score and down payment size. Under the federal Homeowners Protection Act, a lender must automatically cancel PMI once the loan reaches 78% LTV, and a borrower can request cancellation at 80% LTV. On a standard amortization schedule, that typically takes 7 to 10 years. VA loans never require PMI at any down payment level, which is the single largest structural cost difference between the two loan types.

The VA Funding Fee: What It Costs and Who Is Exempt

The VA funding fee replaces PMI as the VA program’s primary cost. It is 2.15% of the loan amount on a borrower’s first use of VA entitlement, or $8,600 on a $400,000 loan, and 3.3% on subsequent use, or $13,200 on the same loan amount. The fee can be financed into the loan rather than paid in cash at closing. Veterans with a qualifying VA disability rating, and surviving spouses receiving Dependency and Indemnity Compensation (DIC), are exempt from the fee entirely.

When Does the VA Funding Fee Pay Off?

This example is illustrative and uses a $400,000 loan amount to keep the comparison consistent. A first-time VA borrower pays an $8,600 funding fee upfront. A comparable conventional borrower with 3% down avoids that fee but pays PMI, averaging roughly $2,100 a year in this example. Dividing the funding fee by the annual PMI savings ($8,600 / $2,100) produces a break-even point of approximately 4 years. Borrowers who plan to stay in the home longer than 4 years typically come out ahead with the VA loan; borrowers who expect to sell or refinance sooner may find the conventional loan’s lower upfront cost more competitive.

DTI and Loan Limits

VA underwriting weighs residual income (cash left over after major monthly obligations) alongside debt-to-income ratio, which tends to be more flexible than the roughly 45% to 50% hard cap conventional underwriting applies. On loan limits, borrowers with full VA entitlement have no cap under the Blue Water Navy Vietnam Veterans Act of 2019. Conventional loans are capped at the conforming loan limit, which the Federal Housing Finance Agency (FHFA) set at $832,750 in most areas for 2026, with a $1,249,125 ceiling in high-cost areas.

	VA Loan	Conventional Loan
Loan Term	15 and 30-year	15 and 30-year
Minimum Down Payment	0%	3%
Minimum Credit Score	Usually 580	620
Debt-to-income requirements	No hard cap; lenders typically use 41% as a guideline, with residual income as the primary qualifier.	43% to 50%, generally
Co-borrower allowed	Yes, even if they don’t reside in the home	Yes, only if they reside in the home
Residency type	Primary residence only	Primary, secondary, or investment property
Mortgage fees	VA loans do not require any mortgage insurance.  Instead, they have a one-time VA funding fee, typically 2.15% of the loan amount for first-time users (ranging from 0.5% to 3.3%).	Private mortgage insurance (PMI), where costs range from 0.22% to 2.25% of the loan amount and are higher for larger loans if you put less than 20% down. You can cancel PMI once they’ve paid off 20% of the home’s value
Special conditions	VA loans have stricter appraisal and inspection standards, and often takes longer to close.	Conforming loan limits, stricter DTI without compensating factors, and PMI until 20% equity.

Frequently Asked Questions (FAQs)

What are VA loans?

A VA loan is a mortgage loan backed by the U.S. Department of Veterans Affairs (VA). Its primary purpose is to help veterans, active-duty service members, and eligible spouses secure home financing with favorable terms. VA loans offer benefits like zero down payment, competitive interest rates, and no private mortgage insurance (PMI), making them a strong choice for eligible borrowers.

What are conventional loans?

Conventional loans are backed by private mortgage lenders, with higher barriers to qualify such as credit score and down payment. Those that meet Fannie Mae and Freddie Mac guidelines are called conforming loans. Conventional loans have much fewer restrictions when it comes to the loan amount, type of property to be purchased, and intended use of the property. They are ideal for borrowers with good credit who can afford a larger down payment and want to avoid the restrictions of government-backed loans. They are far and wide the most frequently used loan type. 

Is a VA loan better than a conventional loan?

If you’re eligible for a VA loan, the zero down payment and no PMI combination is hard to beat, but conventional loans have advantages in specific situations.

VA can win when: you are eligible for a VA loan and have little or no cash for a down payment, you’re buying a primary residence, your credit score is in the 580–680 range (where VA rates are particularly favorable), or you have a service-connected disability and are exempt from the funding fee.

Conventional can win when: you can put 20% down and want to avoid the funding fee entirely, you’re buying a second home or investment property (VA doesn’t allow this), your credit score is above 720 and the rate gap with VA is narrow, or the property doesn’t meet VA appraisal standards.

Do VA loans have lower interest rates than conventional loans?

Typically yes. According to HMDA 2024 data, VA rates generally run 0.25% to 0.50% below comparable conventional rates.

What is the VA funding fee and is it worth paying?

It is a one-time fee of 2.15% of the loan amount on first use (3.3% on subsequent use) that replaces PMI. On a $400,000 loan, it is typically recovered within about 4 years through avoided PMI costs.

Can I use a VA loan with a 20% down payment?

Yes. A larger down payment reduces the loan amount and therefore the dollar cost of the funding fee, though the fee still applies unless the borrower is exempt.

What are the disadvantages of a VA loan?

The funding fee (higher on subsequent use), the requirement that the property meet VA Minimum Property Requirements, and the fact that the loan amount cannot exceed the VA appraisal value without the borrower covering the difference in cash.

If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.