Comparing conventional loans and VA home loans
Eligible military service members, veterans, and surviving spouses often face a fundamental choice between financing their home purchase with a government-backed VA loan or a standard conventional mortgage conforming to Fannie Mae and Freddie Mac standards.
VA loans offer notable advantages, including zero down payment requirements, no monthly private mortgage insurance (PMI), and interest rates that frequently average 0.25% to 0.50% lower than conventional loans. In exchange, the VA charges a one-time funding fee (standardly 2.15% for first-time use with zero down), which can be paid in cash at closing or financed into the loan balance.
Conventional loans require at least 3% down for first-time buyers or 5% down for repeat buyers, and putting down less than 20% requires monthly private mortgage insurance. However, conventional loans carry no government funding fees and allow buyers with 20% or more down to avoid mortgage insurance entirely.
Worked example: Comparing $400,000 mortgage options
Consider an eligible veteran evaluating two 30-year fixed loan offers for a $400,000.00 purchase: Loan A is a conventional mortgage at a 6.75% interest rate with zero upfront fees, while Loan B is a VA home loan at a 6.25% interest rate with an $8,600.00 VA funding fee.
For Loan A (Conventional), the Loan A monthly payment is $2,594.39, resulting in a Loan A finance charge of $533,981.26 and a Loan A total of payments of $933,981.26 with a Loan A APR of 6.75%.
For Loan B (VA Loan), the lower 6.25% note rate reduces the Loan B monthly payment to $2,462.87, saving $131.52 every month.
Even when factoring in the $8,600.00 funding fee, the Loan B finance charge is $495,232.77, resulting in a Loan B total of payments of $886,632.77 and a Loan B APR of 6.46%.
Overall, the cheaper overall choice is Loan B, and the cheaper loan saves $38,748.49 in total financing charges over the life of the loan.
When does each loan programme make the most sense?
A VA loan is almost always superior for military buyers putting down less than 20%, because avoiding monthly PMI delivers substantial cash flow savings that quickly outweigh the upfront funding fee. Furthermore, veterans with service-connected disabilities are completely exempt from the VA funding fee, making the VA option undeniably cheaper.
A conventional loan may be preferable for military buyers who have built substantial equity and can put 20% or more down, especially if they are repeat VA loan users facing higher subsequent-use funding fees (up to 3.30% with zero down).
Inputs for the Conventional loan vs va calculator
Loan A: amount
The loan principal amount borrowed under the conventional mortgage offer.
Loan A: Interest rate
The annual nominal interest rate quoted for the conventional mortgage offer.
Loan A: term
The term of the conventional mortgage in years (typically 30 years or 15 years).
Loan A: origination fee
Any upfront lender origination points or closing fees charged on the conventional loan.
Loan B: amount
The loan principal amount borrowed under the VA home loan offer.
Loan B: Interest rate
The annual nominal interest rate quoted for the VA home loan offer.
Loan B: term
The term of the VA home loan in years (typically 30 years or 15 years).
Loan B: origination fee
The one-time VA funding fee plus any lender origination fees for the VA loan offer.
CALCULATOR QUESTIONS
Conventional vs VA loan comparison questions
Is a VA loan better than a conventional loan?
For eligible veterans and active service members putting down less than 20%, a VA loan is almost always more advantageous. VA loans require no monthly PMI, offer lower average interest rates, and have more flexible underwriting standards than conventional mortgages.
Who is exempt from the VA funding fee?
Veterans receiving VA compensation for a service-connected disability, surviving spouses receiving Dependency and Indemnity Compensation (DIC), and active-duty service members who have been awarded the Purple Heart are fully exempt from the VA funding fee.
Can I switch from a conventional mortgage to a VA loan later?
Yes. If you are an eligible veteran who originally purchased with a conventional mortgage, you can execute a VA cash-out refinance or interest rate reduction refinance loan (IRRRL) to refinance into a VA loan and eliminate monthly PMI.
Why are VA interest rates usually lower than conventional rates?
Because the Department of Veterans Affairs guarantees a portion of every VA loan against default, lenders face significantly lower credit risk, allowing them to offer interest rates that are typically 0.25% to 0.50% lower than conventional market rates.