A friend of mine who retired from the Army bought his first house last year using a VA loan. He had been saving for a down payment for three years, and when his realtor explained that a VA loan required zero down, his first reaction was that he had been saving for nothing. His second reaction, a few weeks later when he saw the funding fee on his closing disclosure, was more complicated.
VA loans are an excellent program that is oversold by lenders and under-explained by most first-time-buyer articles. This is the article for veterans and active-duty military trying to decide whether a VA loan is actually the right choice, and what the funding fee means for the total cost of the loan.
What a VA loan actually is
A VA loan is not a loan from the VA. It is a loan from a regular bank or mortgage company that is guaranteed by the Department of Veterans Affairs. The guarantee is what lets the lender offer terms that would not be possible on a conventional loan: no down payment, no mortgage insurance, and typically a lower interest rate than a comparable conventional product.
Eligibility requires a Certificate of Eligibility (COE) from the VA, which you request based on your service history. Active-duty service members, veterans with qualifying service, and some surviving spouses can qualify. The COE is free and you can request it yourself through the VA’s benefits portal, though most VA-approved lenders will pull it for you during your loan application.
The three features that make VA loans different
No down payment required. Most VA borrowers put zero dollars down at closing. You can put money down if you want (it reduces the funding fee, which I’ll explain in a moment), but you are not required to. This alone is why VA loans are the default answer for most eligible buyers.
No private mortgage insurance. FHA loans require monthly mortgage insurance for the life of the loan. Conventional loans require PMI until you reach 80% loan-to-value. VA loans require neither. The absence of monthly MI is the feature that makes VA loans competitive with conventional loans even in situations where a veteran could afford 20% down.
Competitive interest rates. Because the loan is guaranteed by the VA, lenders take on less risk, which means the quoted rate is often slightly lower than a comparable conventional loan. The difference is usually 0.125 to 0.375 percentage points, which over 30 years is real money.
Those three features together make VA loans the best available mortgage product for many first-time military buyers. The catch is feature number four.
The funding fee
VA loans charge a one-time funding fee that ranges from 0.5% to 3.3% of the loan amount depending on your specific situation. This fee replaces the mortgage insurance you do not pay monthly, and it is substantial enough that most VA articles skim over it.
For first-time VA loan users putting zero down on a regular purchase, the funding fee is currently 2.15% of the loan amount. On a $400,000 house with zero down, that is $8,600 added to your loan balance at closing.
The fee is reduced if you make a down payment. Putting 5% down drops the fee to 1.5%. Putting 10% or more drops it to 1.25%. For subsequent VA loan users (a second VA loan later in life), the fee jumps to 3.3% on zero-down purchases, which is meaningful.
There are important exemptions. Veterans receiving VA compensation for a service-connected disability, veterans eligible to receive that compensation who are drawing retirement pay instead, and surviving spouses receiving DIC are not required to pay the funding fee. For veterans in these categories, a VA loan has effectively no additional cost beyond the normal closing costs of any mortgage, which makes it the obvious winner over any other loan type.
When VA beats every other option
If you are a veteran with service-connected disability status exempting you from the funding fee, a VA loan almost always wins. No down payment, no mortgage insurance, competitive rate, and no funding fee means the math is simply better than FHA or conventional.
If you are a first-time VA user with zero or minimal savings, VA beats FHA for one reason that overwhelms everything else: FHA’s monthly mortgage insurance is permanent for the life of the loan on minimum-down-payment loans. VA has no monthly MI at all. Over a 30-year loan, the lifetime MI you avoid on a VA loan dwarfs the funding fee you pay at closing.
When conventional might win
If you qualify for a conventional loan with 10-20% down, have excellent credit, and are willing to do the math, a conventional loan can occasionally beat a VA loan on total cost. The reason is that the VA funding fee on a $400,000 loan ($8,600 at 2.15%) is bigger than the total PMI you might pay on a conventional loan with 10% down over the 7-8 years it typically takes to reach 20% equity and remove PMI.
This comparison is narrow and specific. It favors conventional only for borrowers with good down payment savings, strong credit, and a stable timeline. For most veterans in their first ten years post-service, the VA loan still wins.
The comparison I wish my friend had done
Before my friend bought his house, he had saved roughly $50,000 for a down payment. When he found out a VA loan required none of it, he asked his lender whether it was smarter to use the VA loan with zero down or put the $50,000 down on a conventional loan.
His lender, who made more money on the VA loan, recommended the VA loan. The honest answer, which I only learned after going through the numbers later, was that putting $50,000 down on the VA loan (reducing the funding fee to 1.25% instead of 2.15%) and keeping the rest as liquid savings was probably the best of the three options. The funding fee savings from a 12.5% down payment on a $400,000 house was about $3,600, plus his monthly payment dropped because the loan balance was smaller, plus he still had the safety of a VA-guaranteed loan with no monthly MI.
I wrote a separate article comparing FHA and conventional loans, and a broader first-time buyer mortgage guide, both of which are useful context for the VA-versus-conventional decision specifically. A VA loan is not just “the military version of a mortgage.” It is a distinct product with its own tradeoffs, and the tradeoffs reward the buyers who actually run the numbers instead of taking the first lender’s first recommendation.
What I’d tell a veteran friend today
Three things.
First, get your Certificate of Eligibility before you talk to a lender. It takes ten minutes on the VA portal. Walking into a lender with the COE already in hand saves time and makes you a more serious-looking borrower.
Second, check whether you qualify for the funding fee exemption. If you have any service-connected disability rating, even a partial one, you may be exempt, and that changes the math significantly. Ask your VA representative or check your VA account status before closing.
Third, run the numbers with and without a down payment. VA loans allow zero down, but zero down is not always the right answer. If you have savings, putting some down reduces the funding fee (if you owe one) and reduces your monthly payment. Whether to use those savings or keep them liquid is a personal financial question, not a loan-qualification question, and a good lender will walk you through both options. A lender who only shows you the zero-down version is showing you the version that earns them the biggest commission, not the version that saves you the most money.