Key Differences Between VA and Conventional Loans

The most obvious difference is the down payment. VA loans let eligible veterans, active-duty service members, and surviving spouses buy a home with zero down. Conventional loans require at least 3% to 5% for most borrowers. So for a $400,000 home, that's $12,000 to $20,000 you'd need upfront with a conventional loan.

But the down payment difference is just the start. Mortgage insurance is where the real cost gap shows up for most borrowers. Conventional loans require private mortgage insurance (PMI) any time you put down less than 20%. PMI typically runs between 0.5% and 1.5% of the loan amount each year, per the CFPB. On a $400,000 loan, that adds $2,000 to $6,000 per year to your housing costs. VA loans have no monthly PMI. That alone saves eligible borrowers hundreds of dollars per month.

The table below shows how the two loan types compare across the most important factors.

The VA Home Loan Guaranty program has backed more than 28 million loans since 1944. So this is not a niche product. It's a well-tested program with strong lender support. That said, eligibility is the starting point. You can check your eligibility directly through the VA's eligibility page before going further.

The VA Funding Fee: What It Actually Costs You

How the Funding Fee Works

VA loans do not require PMI. But they do have a one-time funding fee. This fee helps keep the VA loan program running for future veterans. You pay it at closing or roll it into your loan balance.

The amount depends on two things: whether this is your first VA loan, and how much you put down. First-time VA loan users putting down less than 5% pay a 2.15% funding fee. That's $8,600 on a $400,000 loan. Subsequent users with less than 5% down pay 3.3%, or $13,200 on the same loan. The table below shows the full breakdown.

Who Pays No Funding Fee

Some veterans pay no funding fee at all. If you receive VA disability compensation for a service-connected disability, VA rules exempt you from the fee. Surviving spouses who receive Dependency and Indemnity Compensation (DIC) are also exempt. This exemption can save you thousands of dollars. So if you have a disability rating, check your exempt status before closing.

The funding fee often gets used to argue against VA loans. But the math usually still favors VA. PMI on a $400,000 conventional loan at 1% annually costs $4,000 per year. The 2.15% VA funding fee on the same loan is $8,600 one time. You break even in about 26 months. After that, you're saving money every month because you have no PMI. This is exactly the kind of calculation that gets skipped when buyers try to navigate the process alone.

When a VA Loan Is the Better Choice

Little to No Down Payment

If you don't have a large down payment saved, VA is almost always the better path. You skip PMI entirely. You get into a home with zero down. And you don't need to save 20% to avoid monthly mortgage insurance costs.

VA loans also tend to carry lower interest rates than comparable conventional loans for the same borrower. The CFPB has documented this gap consistently across loan types. Lower rates happen because the government guaranty reduces lender risk. That reduction in risk passes through to borrowers as a lower rate. Even a 0.25% rate difference saves real money over a 30-year loan.

Because of the no-down-payment option, VA loans are also strong for buyers who want to keep cash on hand after closing. Reserves matter. Having money left after closing gives you a buffer for repairs, moving costs, and surprises. So going to zero down through VA doesn't always mean you're stretching thin. It means you're keeping options open.

Credit Score Flexibility

VA guidelines tend to accept lower credit scores than conventional loan requirements. Many VA lenders work with scores as low as 580 to 620. Conventional loans typically set a floor of 620, and better terms usually require higher scores. So if your credit took a hit during service or you're still rebuilding, VA often gives you a viable path that conventional doesn't.

In Colorado, we also see VA loans perform well in markets like Pueblo and parts of the Front Range where purchase prices are more moderate. The zero-down feature is especially powerful there because it gets buyers into homeownership without years of saving. In Florida, buyers in markets like Jacksonville and Pensacola, near major military installations, use VA loans heavily for the same reasons. If you are buying as a Colorado homebuyer or a Florida resident, understanding what local lenders look for on VA files makes a difference.

When Conventional Might Be the Better Choice

You Have a 20% Down Payment

This is where most articles get it wrong. They treat VA as the automatic winner for any eligible borrower. That's too simple.

If you can put 20% or more down, conventional eliminates PMI entirely. You pay no mortgage insurance and no funding fee. So you'd pay a 2.15% VA funding fee for no benefit you couldn't also get through conventional. For a $400,000 home, that's $8,600 you could keep in your pocket.

The rate difference also narrows at higher credit scores. Borrowers with 740+ credit scores often find conventional rates very competitive. The VA rate advantage shrinks at that level. So if you have strong credit and a full down payment, both loans get close on cost, and conventional wins on the funding fee alone.

Property Type and Future Plans

VA loans cover primary residences only. If you want to buy a vacation home in the mountains, a rental property, or a second home in Florida, VA isn't an option. You need conventional. Per Fannie Mae guidelines, conventional loans allow for primary residences, second homes, and investment properties under the same program framework. That flexibility matters if your plans go beyond your primary home.

There's also the seller perception issue. In competitive markets, some sellers see VA offers as more complicated because of VA appraisal requirements. This is less about the loan and more about seller perception. But it's real. In multiple-offer situations in Denver or certain Florida markets, a conventional offer can sometimes feel cleaner to a seller who doesn't understand VA well. That's frustrating, but it's worth knowing before you're in a bidding situation.

"I see veterans assume VA is always the best move because they earned the benefit. And they did earn it. But the right loan is the one that fits your specific numbers. We've had clients where conventional saved them money, and we've had clients where VA was so obviously better that the math wasn't even close. You can't know which is which until someone actually runs both scenarios for your situation."

Reed Letson, Owner, Elevation Mortgage

Common Mistakes Veterans Make When Choosing

Mistake 1: Defaulting to VA Without Running the Numbers

Eligible borrowers often choose VA automatically because they earned the benefit. That's understandable. But if you have 20% down or want an investment property, conventional may cost you less overall. Run both scenarios before deciding.

Mistake 2: Forgetting the Funding Fee in the Comparison

We regularly see buyers compare VA and conventional monthly payments without factoring in the VA funding fee. If you roll the fee into the loan, it raises your loan balance and your monthly payment. That changes the comparison. Make sure both scenarios reflect the full cost.

Mistake 3: Not Checking for Funding Fee Exemptions

Veterans with service-connected disabilities often qualify for a full exemption from the funding fee. We've seen borrowers pay thousands in fees they didn't owe because nobody checked their disability status before closing. Ask your lender to confirm your exemption status early in the process. Don't wait until the closing disclosure to find out.

Questions to Ask Your Lender

The full range of loan programs available to veterans goes beyond just VA. Depending on your situation, conventional, FHA, or other options might also be worth a look. An independent broker can run all of those comparisons without being tied to one product.