Closing costs on a VA loan and a conventional loan both fall in the 2% to 6% range of the loan amount, but what fills that range is different enough that the cheaper option on paper is often the more expensive one in practice. When you compare VA loan versus conventional loan closing costs, the decisive line items are the VA funding fee, private mortgage insurance on conventional loans under 20% down, and the federal caps on what lenders can charge veterans. Get those three right and the rest of the settlement statement mostly takes care of itself.
The Funding Fee and PMI Trade-Off
The biggest single difference is that VA loans carry a one-time funding fee and no monthly mortgage insurance, while conventional loans with less than 20% down carry no funding fee but require private mortgage insurance every month until you build enough equity.1Veterans Affairs. VA Purchase Loan
For a first-time VA borrower on a loan closed between April 7, 2023 and June 9, 2034, the funding fee runs 2.15% of the loan with no down payment, 1.50% with 5% down, and 1.25% with 10% or more down. Subsequent use with no down payment climbs to 3.30%. On a $400,000 loan with nothing down, a first-time borrower owes $8,600; a repeat borrower owes $13,200.2Office of the Law Revision Counsel. 38 USC 3729 – Loan Fee The fee can be rolled into the loan balance, which spares you the cash at closing but adds to what you owe.
Conventional borrowers who put down less than 20% pay private mortgage insurance instead.3Consumer Financial Protection Bureau. What Is Private Mortgage Insurance Annual premiums generally range from about 0.46% of the loan for borrowers with credit scores above 760 to about 1.50% for scores in the 620–639 range. That’s roughly $153 to $500 a month on a $400,000 loan. VA loans never require PMI at any down payment level.1Veterans Affairs. VA Purchase Loan
So the trade is a lump-sum funding fee against a recurring monthly premium. Which is cheaper depends on how long you hold the loan and what your PMI rate would be. The section at the bottom of this article works through that comparison.
Who Owes No Funding Fee
Several groups of VA borrowers pay no funding fee at all, which is where VA closings pull well ahead of conventional. Federal law exempts:
- Veterans receiving VA disability compensation at any rating, from 10% to 100%, including those found eligible through a pre-discharge exam before payments begin
- Active-duty service members who provide evidence of a Purple Heart award on or before closing
- Surviving spouses of veterans who died in service or from a service-connected disability
The exemption is written directly into statute.2Office of the Law Revision Counsel. 38 USC 3729 – Loan Fee For an exempt buyer, the largest VA-specific cost disappears while the largest conventional cost (PMI) still applies to any conventional purchase under 20% down. A veteran with a 10% rating buying a $400,000 home with zero down avoids $8,600 in funding fees and carries no monthly mortgage insurance. That combination is difficult for a conventional loan to beat.
Lender Fee Caps on VA Loans
Federal regulation limits what a lender can charge a VA borrower in a way conventional lending does not match. The lender’s origination fee is capped at a flat 1% of the loan amount, and that 1% has to cover everything origination-related. If a lender charges the full 1%, it cannot add separate processing, underwriting, or document preparation fees on top.4eCFR. 38 CFR 36.4313 – Charges and Fees
Beyond the origination fee, VA borrowers can be charged only for a defined list of items: the VA appraisal, recording fees and taxes, credit report, property tax and insurance escrow deposits, hazard insurance, survey where required, title examination and title insurance, and flood zone determination. Anything not on that list, the lender absorbs or the seller pays. Settlement-related attorney fees, for example, cannot be charged to the veteran.5Department of Veterans Affairs. Circular 26-10-01 – Impact of New RESPA Rule on Fees and Charges for VA Loans
Conventional lenders face no comparable restriction. Origination fees on conventional loans typically run 0.5% to 1%, but conventional lenders can layer on processing, underwriting, and administrative charges that push total lender costs well past what a VA borrower would pay.
Third-Party Costs Both Loans Share
A large portion of any closing statement goes to costs neither the lender nor the borrower controls. The dollar amounts are similar on both loan types, with a few differences worth knowing.
Appraisal
Conventional appraisals on a standard single-family home generally run $300 to $600. VA appraisals typically run $600 to $1,200, with a ceiling of $1,300 in high-cost areas, because the VA sets maximum allowable fees by region and requires appraisers to evaluate the property’s condition alongside its value. VA appraisal fees are not negotiated between borrower and appraiser.
Title Insurance
Lender’s title insurance is required on nearly every mortgage. Owner’s title insurance is optional but common. Combined premiums typically run 0.5% to 1% of the purchase price, so roughly $2,000 to $4,000 on a $400,000 home, with wide variation by state.
Prepaids and Escrow
Both loan types collect a prorated share of property taxes covering the period from closing to the next tax due date, six months to a year of homeowners insurance premiums upfront, and an initial escrow deposit the lender will use to pay future tax and insurance bills. You also owe per-diem interest from your closing date through the end of that month, so closing later in the month cuts your prepaid interest. That’s one of the few closing costs you can influence by choosing the date.
Smaller Fees
Credit report fees run about $30 to $100. Recording fees vary by county and are usually modest. Transfer taxes range from a fraction of a percent to over 1% of the purchase price depending on where you buy. These apply to both loan types, though a VA borrower has the added protection that nothing outside the allowable list can be added to their side.
Seller Contribution Caps
Both loan types let you negotiate for the seller to cover closing costs, and the caps work differently enough that the same 4% or 6% contribution can mean different things.
On a VA loan, the seller can pay any amount toward standard closing costs (appraisal, title insurance, recording, and so on) with no ceiling. Separate from that, the VA caps seller concessions at 4% of the home’s reasonable value. Concessions are anything of value added beyond standard closing costs: credits toward the funding fee, paying off the buyer’s debts, or prepaying hazard insurance.6Veterans Affairs. VA Funding Fee and Loan Closing Costs Total seller help can therefore exceed 4%, because normal closing costs sit outside the cap.
Conventional loans use a sliding scale tied to loan-to-value ratio. For a primary residence or second home, sellers can contribute up to 3% when the down payment is under 10%, up to 6% when it’s 10% to 25%, and up to 9% when it’s above 25%. Investment properties are capped at 2%.7Fannie Mae. B3-4.1-02 Interested Party Contributions (IPCs) The conventional cap covers all closing costs, not just extras. A buyer putting 5% down on a conventional loan is working with a tight 3% ceiling that has to cover everything the seller pays for.
Discount Points and Lender Credits
Both loan types let you pay discount points at closing to buy down the rate. One point equals 1% of the loan amount and typically cuts the rate by roughly 0.25%, though the exact reduction depends on the lender and market. On a $400,000 loan, one point costs $4,000. Whether points pay off depends on how long you stay in the home; if it takes seven years for the monthly savings to recoup the upfront cost and you plan to sell in five, points lose.
Points on a VA purchase must be paid in cash at closing. They cannot be rolled into the loan balance the way the funding fee can. Most lenders cap the number of points a VA borrower can buy at around four, though the VA sets no statutory maximum for purchase loans.
Lender credits go the other direction. You accept a higher rate, typically 0.25% to 0.50% above base, and the lender credits you at closing to offset fees.8Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points Available on both loan types. If you plan to refinance or sell within a few years, credits usually come out ahead. If you’re staying a decade or more, paying costs upfront and keeping the lower rate saves more.
Total Closing Costs and the Long-Term Math
Conventional closing costs generally run 2% to 5% of the loan amount when lender fees, third-party charges, and prepaids are all included.9Fannie Mae. Closing Costs Calculator On a $400,000 home with 10% down, that’s roughly $7,200 to $18,000 on a $360,000 loan. PMI adds a monthly cost on top if the down payment is under 20%.
VA totals range more widely, from about 2% to 6% of the loan, because the funding fee swings the number so much. A first-time borrower putting nothing down and paying the 2.15% fee lands near the top of that range. An exempt disabled veteran in a state with low transfer taxes can close for under 2%.
The comparison changes once you look past closing day. A conventional borrower putting 5% down on a $400,000 home pays no funding fee but could owe $200 or more per month in PMI until the loan reaches 78% of the home’s original value. A VA borrower on the same home pays $8,600 in funding fees, which can be financed, and never pays a dollar of PMI. Over five years, PMI alone can total $12,000 or more. For most buyers who plan to stay in the home more than a few years, the VA loan’s higher upfront cost becomes the cheaper path. Looking only at the settlement statement is what makes that math easy to miss.