VA loan vs conventional (zero down): funding fee vs PMI
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By Editorial team
A $380,000 US home, compared with a VA loan at 6.50% (0% down, 2.15% funding fee rolled in) against a conventional loan at 6.75% (5% down, 0.50% PMI), produces monthly payments of $2,453 and $2,642 respectively. The VA loan saves $39/month in recurring payments and requires $19,000 less cash at closing, in exchange for the funding fee rolled into the principal. Over 30 years, the VA loan accumulates about $13,171 more in scheduled interest because the larger principal is amortized at roughly the same rate. This article is for eligible veterans weighing whether the VA loan or a conventional low-down-payment alternative is the better fit.
The scenario modeled
Both loans use a 30-year fixed term with no taxes, insurance, or HOA modeled so the comparison stays focused on loan structure. The VA loan has no down payment and the 2.15% first-use funding fee is added to the principal, producing a $388,170 starting balance. The conventional loan takes a 5% down payment ($19,000 cash) and requires PMI at 0.50% annually until the loan reaches 78% LTV of the original value.
| Input | VA loan | Conventional |
|---|---|---|
| Home price | $380,000 | $380,000 |
| Down payment | $0 (0%) | $19,000 (5%) |
| Base loan amount | $380,000 | $361,000 |
| Funding fee / MI premium | $8,170 rolled in (2.15% first use) | 0.50% PMI monthly |
| Starting principal | $388,170 | $361,000 |
| Rate | 6.50% fixed | 6.75% fixed |
| Term | 30 years | 30 years |
The findings
The VA loan's monthly advantage is modest ($39/month) but the cash-at-closing advantage is significant ($19,000). For a first-time buyer, that $19,000 is often the difference between buying this year and buying two years from now. The VA loan's only "cost" is the funding fee, which is rolled into the principal rather than paid in cash, and the fact that amortizing a larger starting balance generates more total interest over the life of the loan.
Looking for the FHA comparison instead? FHA vs conventional runs the same scenario shape for 3.5%-down FHA loans, where the trade-off involves permanent MIP rather than a one-time funding fee.
| VA (0% down) | Conventional (5% down) | Difference | |
|---|---|---|---|
| Cash required at closing | $0 (plus standard closing costs) | $19,000 (plus standard closing costs) | $19,000 less cash VA |
| Monthly P&I | $2,453 | $2,492 | $39/month more VA (larger balance) |
| Monthly PMI | None | $150 | VA has no MI |
| Total monthly payment | $2,453 | $2,642 | $39/month less VA |
| Total interest (30 years) | $495,089 | $481,918 | $13,171 more VA |
US context
The VA home loan benefit has funded more than 28 million loans since 1944 and remains one of the most favorable mortgage programs in the US for eligible borrowers. The combination of no required down payment, no mortgage insurance, and generally competitive rates means VA is almost always the better structural choice versus FHA or conventional low-down-payment products for qualifying veterans. Disabled veterans with a VA service-connected disability rating are exempt from the funding fee entirely, which removes the only meaningful cost disadvantage relative to conventional loans.
Source: U.S. Department of Veterans Affairs, "VA-Guaranteed Home Loan: Funding Fee and Closing Costs," accessed April 2026. URL: https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
When this comparison applies, and when it does not
VA loan is the clear choice when: you are eligible, plan to occupy the property as your primary residence, and either lack the cash for a 20% conventional down payment or would prefer to keep that cash invested elsewhere.
Conventional may still win when:
- You can comfortably put 20% down. At 20% down, conventional has no PMI and no funding fee. The lower balance amortizes to less total interest than either VA or low-down conventional.
- You are buying in a highly competitive market. Some sellers prefer conventional offers because VA appraisals can flag Minimum Property Requirement issues that must be cured before closing. In a bidding war, a conventional offer may be accepted over a higher VA offer.
- You plan to move or refinance within 2-3 years. The funding fee is a one-time cost that is easier to absorb on a 10+ year hold. On a short hold, the funding fee plus slightly higher interest on the larger balance can outweigh the monthly PMI savings.
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Frequently asked questions
- Who is eligible for a VA loan?
- VA loans are available to active-duty service members, veterans, and qualifying surviving spouses who have obtained a Certificate of Eligibility from the Department of Veterans Affairs. Minimum service requirements vary by era but generally require 90 continuous days of active-duty service during wartime, 181 days during peacetime, or 6 years in the National Guard or Reserves. Most lenders also apply their own credit-score and income requirements on top of VA eligibility.
- What is the VA funding fee and why is it rolled into the loan?
- The VA funding fee funds the loan guaranty program and replaces mortgage insurance. For first-time use with no down payment, the fee is 2.15% of the loan amount as of 2026. On our modeled $380,000 home, that is $8,170, which is rolled into the loan principal rather than paid in cash at closing. Subsequent VA loan uses carry a higher 3.3% fee, and borrowers with a service-connected disability rating are typically exempt from the fee entirely.
- Do VA loans have mortgage insurance?
- No. VA loans have no monthly mortgage insurance premium, even at 0% down. This is the core advantage over FHA and conventional low-down-payment loans, both of which require monthly MI. The VA funding fee replaces MI as a one-time up-front cost.
- Does a VA loan require a specific appraisal or inspection?
- VA loans require an appraisal by a VA-approved appraiser who evaluates both market value and the VA's Minimum Property Requirements (safety, structural integrity, sanitation). This is a standard appraisal rather than a full home inspection, but it does catch some issues that a conventional appraisal would not. Sellers in competitive markets occasionally prefer conventional offers because VA appraisals can flag repair requirements that must be completed before closing.
- Can I use a VA loan for a second home or investment property?
- No. VA loans are limited to primary residences that the borrower intends to occupy within 60 days of closing and use as their main home. They cannot be used for second homes, vacation properties, or pure investment properties. One exception: a multi-unit property (up to 4 units) is eligible if the borrower occupies one of the units as their primary residence.