The VA loan is one of the most celebrated benefits of military service, and for good reason. No down payment. No private mortgage insurance. Competitive interest rates. For most veterans, it’s an obvious choice—the kind of benefit you’d be foolish to leave on the table.
But here’s what the VA loan evangelists won’t tell you: sometimes the smartest financial move is to skip it entirely.
This isn’t contrarian for the sake of being contrarian. There are specific, quantifiable situations where a conventional mortgage serves a veteran better than the benefit they earned. And making the wrong choice here can cost tens of thousands of dollars over the life of your loan.
The funding fee problem nobody wants to discuss
The VA loan’s biggest hidden cost is the funding fee—a one-time charge that ranges from 1.25% to 3.6% of your loan amount, depending on your down payment, whether you’ve used the benefit before, and your service type (according to the VA’s official funding fee tables). For a $400,000 home with no down payment on your first use, that’s $9,200 added to your loan balance for regular military (2.3% rate).
Most veterans roll this fee into their mortgage, which means they’re paying interest on it for 30 years. That $9,200 fee actually costs closer to $16,000 over the life of the loan at current rates.
Now compare that to a conventional loan where you’re putting 20% down. No funding fee. No PMI. The only additional cost is the down payment itself—money that becomes equity in your home, not a fee that disappears into government coffers.
If you’ve been saving aggressively and have 20% available, the math shifts dramatically. The funding fee becomes an expensive price to pay for the privilege of keeping your cash in the bank.
When your credit score changes everything
VA loans are famous for being more forgiving of credit imperfections. But here’s what gets lost in that narrative: if you have excellent credit, you may not be fully rewarded for it within the VA system.
While VA loan rates do vary by lender and individual borrower factors, the VA’s standardized structure means lenders have less flexibility to offer aggressive rate discounts for exceptional credit compared to conventional loans. A veteran with a 780 credit score shopping VA loans may see modest rate variation between lenders, but the spread is typically narrower than what conventional lenders offer.
On a conventional mortgage, that 780 score can unlock the best-tier pricing—potentially 0.5% to 0.75% lower than what a 660-score borrower would receive from the same lender. Over 30 years on a $350,000 loan, that rate difference translates to roughly $40,000 in interest savings.
So if you’ve spent years building pristine credit, a conventional loan may let you benefit more directly from that work. The VA loan’s borrower-friendly structure means less rate stratification—which helps veterans with lower credit but may leave those with excellent credit on the table.
The investment property conundrum
VA loans are strictly for primary residences. You must certify that you intend to live in the home. This creates an interesting problem for veterans who want to build wealth through real estate.
Say you’re planning to buy a duplex, live in one unit, and rent the other. Both VA and conventional loans allow this—technically. But here’s where strategy matters.
If you use your VA entitlement on that duplex, you’ve committed your most powerful financing tool to a property where you can only access half the benefit. The rental income helps, but you’ve now tied up your VA entitlement.
Meanwhile, a veteran who uses conventional financing for the duplex preserves their VA benefit for a future primary residence purchase. They might pay slightly more upfront, but they maintain strategic flexibility. When they’re ready to upgrade to a single-family home, they have full VA entitlement waiting.
The decision framework for buying rental property versus paying down your primary mortgage applies doubly here. Veterans have an extra variable to optimize: the sequencing of their VA benefit usage.
The appraisal problem that kills deals
VA appraisals are notoriously strict. The VA employs specific Minimum Property Requirements that go beyond what conventional appraisals demand. Peeling paint, missing handrails, non-functional systems—issues that a conventional appraiser might note but overlook can torpedo a VA purchase entirely.
In competitive markets, this becomes a genuine liability. Sellers know VA loans take longer and come with more conditions. When they’re choosing between multiple offers, the VA buyer often loses—not because of their offer price, but because of the perceived hassle.
Some sellers won’t even consider VA offers. That’s illegal discrimination in theory, but it happens constantly in practice. Sellers simply accept the conventional offer that came in at the same price, citing “stronger terms.”
If you’re shopping in a seller’s market with multiple offer situations, a conventional pre-approval can be worth more than the VA loan’s financial benefits. What good is saving $10,000 on fees if you lose every house you actually want?
The refinancing trap
Here’s a scenario that plays out more often than veterans realize: You buy with a VA loan, rates drop, and you want to refinance. The VA’s Interest Rate Reduction Refinance Loan (IRRRL) seems perfect—streamlined, minimal documentation, no appraisal required.
But the IRRRL comes with another funding fee. If you’re refinancing to a VA loan from a VA loan, you’ll pay 0.5% of the loan amount. Refinance a $350,000 balance and that’s $1,750 added to your new loan.
A conventional refinance has no such fee. If you have 20% equity, you’re refinancing with zero additional costs beyond standard closing fees. For veterans who refinance multiple times—and many do, chasing rate drops—these funding fees compound.
The veteran who started conventional and refinances conventional pays thousands less over their homeownership lifetime than the veteran trapped in the VA-to-VA cycle.
When PMI actually makes sense
This sounds like financial heresy, but hear me out: sometimes paying PMI on a conventional loan beats the VA funding fee.
PMI on a conventional loan with 10% down typically runs 0.5% to 1% of the loan amount annually. On a $350,000 loan, that’s roughly $1,750 to $3,500 per year. Painful, yes.
But PMI disappears. Once you hit 20% equity—through payments, appreciation, or both—you can request PMI cancellation. It automatically terminates at 22% equity.
The VA funding fee, by contrast, is a permanent addition to your loan balance. You’re paying interest on it for 30 years regardless of your equity position.
Run the numbers on a 5-7 year timeline. A veteran putting 10% down on a conventional loan pays PMI for perhaps 4-5 years before reaching 20% equity. Total PMI cost: maybe $10,000-15,000.
That same veteran using a VA loan with 10% down pays a funding fee of 1.25%, or $4,375 on $350,000. Seems cheaper, right? But financed over 30 years with interest, that fee actually costs $7,500+. And if the veteran refinances later, another fee stacks on top.
The break-even math is closer than most people assume. For veterans planning to aggressively pay down their mortgage or expecting significant home appreciation, PMI can actually cost less than the funding fee structure.
The high-cost area calculation
In expensive markets, the VA loan’s no-down-payment benefit shines brightest—or does it?
Consider a $800,000 home in a high-cost area. With a VA loan, you finance the entire amount plus a funding fee that now hits $18,400 (2.3% for subsequent use). Your loan balance starts at $818,400.
With 20% down on a conventional loan, you’re financing $640,000. Yes, you needed $160,000 in cash. But your monthly payment is substantially lower, and you’re building equity from day one instead of starting underwater relative to your purchase price.
More importantly, that $160,000 down payment doesn’t disappear. It’s sitting in your home as equity, growing with appreciation. The $18,400 funding fee? Gone forever.
For high earners in expensive markets—and many veterans in tech, medicine, or senior military positions fit this profile—the conventional route preserves wealth better than the VA loan’s leverage.
The disability exemption changes everything
There’s one major exception to the funding fee problem: veterans with service-connected disabilities are exempt from the VA funding fee entirely.
If you have any VA disability rating—even 10%—the funding fee disappears. Suddenly the VA loan’s advantages become overwhelming. No down payment, no PMI, no funding fee. There’s almost no scenario where a conventional loan beats this combination.
The cruel irony is that many veterans don’t discover their disability rating until after they’ve already purchased homes. A knee injury you’ve been living with for years? That could be a 10% rating. Tinnitus from your service? Another 10%.
Before writing off the VA loan, verify your disability status. File claims for any service-connected conditions. That rating transforms the entire calculation.
Making the decision
Skip the VA loan if:
- You have 20% down payment available and excellent credit
- You’re buying in a competitive market where VA offers lose consistently
- You’re purchasing investment property and want to preserve your entitlement
- You plan to refinance multiple times over your homeownership
- You’re buying a property that might not meet VA minimum standards
Use the VA loan if:
- You have any service-connected disability rating
- You have limited savings for a down payment
- Your credit is good but not exceptional
- You’re buying in a buyer’s market with negotiating leverage
- You plan to stay in the home long-term without refinancing
The decision isn’t about loyalty to your benefit or maximizing some abstract optimization. It’s about running the actual numbers on your actual situation.
Understanding what nobody tells you about private mortgage insurance helps clarify the PMI versus funding fee comparison. And the math behind FHA versus conventional loans reveals similar trade-offs that apply to veteran borrowers weighing their options.
The next question
You’ve determined whether VA or conventional makes sense for this purchase. But that raises a deeper strategic question: if you’re not using your VA entitlement now, when should you deploy it?
Some veterans save their VA benefit for their “forever home,” using conventional financing for starter properties. Others use VA early when cash is tight, then transition to conventional as their wealth grows. There’s no universally correct answer, only the answer that fits your specific financial trajectory.
What’s the optimal sequencing of your VA benefit across a lifetime of home purchases?