Not every one can afford to pay the cost of the house/flat at one go from one’s own source, as the cost has increased beyond affordable levels in metros and A class cities. Further the desire to own a house goes on extending beyond our means, as it is a one time purchase. So, it is quite natural you decide to avail a housing loan from a Bank or HFC or a Co-operative Bank.
The housing loan is for a long term and if you opt  for a short term repayment, the quantum of loan eligible will come down and will not match with your demand. When it is a long term proposition the Interest Rate Risk plays a vital role and one must understand its implication thoroughly, since the lending institutions would always like to cover their risk and pass on the risk to the loan takers and one must understand the terms of the loan correctly.
The very purpose of the fair practice code to be adopted by all Financial Institutions is to minimise the hidden rules/charges and convey in clear terms all about the loan, its repayment, the interest rate, how it is calculated, how to switch over from the Fixed Rate to Floating Rate and vice versa, all about various charges to be levied, and  finally the setting of a Grievance Redressal  Mechanism, in case of any complaint. You must ask for a copy of this and go through it carefully. Even in adopting a Fair Practice Code, the Financial Institution may leave certain areas ambiguous.
Before you approach an institution, you must get the following documents ready, which are compulsorily required for processing your proposal, along with copies of passport size photographs of self, co-applicant and guarantor(s):
The house/flat papers/agreement and receipts for payment of advance amount to the builder/seller. If you want to have a preliminary discussion to know your eligibility of the loan amount, you can discuss with the Financial Institution even before selecting or finalising the house/plot purchase.
Residence address proof, for self and co-applicant and guarantor(s), if any
Employment proof/order of appointment/contract, salary slips for the last six months for self, co-applicant and guarantor(s), if any, along with Form 16 (particulars of salary paid and tax deducted during the whole year which is required to be submitted along with your income tax return) issued by your employer for the last three years.
Bank accounts statements at least for six months. (Some institutions ask for one year.) Plus your credit card statements for three months. For self and co-applicant and guarantor(s).
If you have any other income, like rent, agriculture income etc., necessary documentary proof like rent agreement, agriculture land documents, receipts for tax paid etc may also be required.
If you are not employed and you are a professional and self employed or doing business, a short write up may be prepared about you and your business and shown. The  documents like Balance Sheet, P&L Account, Sales tax assessment/Income tax Assessment orders for the last three years may be produced.
As mentioned earlier you will obtain a copy of the Fair Practice Code, and go through it carefully. You can compare the rate of interest offered, the charges, etc with those obtained from other institutions and finally decide. You must, in particular understand the implications of certain terms/phrases used in this regard:
Rate of Interest
There are at present three options available. The first one is fixed rate of interest, the second is floating or variable and the third one is a combination of fixed and floating
Fixed rate of Interest:    When a rate of interest is quoted as fixed, it does not mean that it is fixed for the  entire period of the loan of say 15 years.  The Financial Institutions always keep an option in the agreement which you will be signing that in the event of abnormal fluctuations in the interest rate, the company/bank has the right to change/increase the interest rate and it is binding on the borrower. So, when you go for this option, you must  know/enquire about the standing of the financial institutions, and its past history.
Some financial institutions are offering fixed for say three years or five years, and at the end of the said, the interest rate is revised and you are given an option to continue with the said revised interest rate, or you are free to switch over to any other institutions without payment of any charges.
If any institution offers you a fixed rate for the whole term of the loan, you must get it in writing in the sanction letter and the agreement which you execute should also mention that the interest rate opted is fixed rate for the whole period of loan.
Floating or Variable: Floating or variable interest rate means that the interest rate quoted under this scheme will change periodically as and when the institution’s prime lending rate changes. It may change every three months, every six months, or any time depending on the market conditions. If you opt for this scheme, the interest rate risk is with you, and in the event of abnormal increase in interest rate, you will be burdened with more interest. As a result of increase in interest amount to be paid, the period of the loan will get extended, where the EMI amounts remain the same. Or else, the EMI amount will be enhanced  to cover the increased amount of interest to be paid by you. During 2005-2006 some institutions/banks have changed/increased their variable interest rate four to five times. (Thus effecting a total increase of 2 per cent to 2.50 per cent in the interest rate). Some institution/banks offer special discounted rate calling it a festival bonanza,  but bring the rates at par with their card rate very soon. Whether such discounted rate will continue to be available vis-à-vis their card rate should be ascertained and recorded.
A combination of Fixed and Floating Rate: Some Institutions offer you fixed rate for an initial period of three to five years, and then change the rate at the end of the agreed period, for another similar period say three  to five years and this change is continued every three to five years  over the agreed total period. Since the revision of interest rate at the end of every agreed period is at the discretion of the lending institution, you must ensure that you get an option to switch over if the rate is not agreeable to you, without payment of any charges.
Change from fixed to floating and vice versa: This is generally permitted by all institutions/banks on payment of charges and the charges are now recorded in the Fair Practice Code. If it is not stated, you must ascertain this.
How interest is calculated:
1. Annual Rest:
This means that the interest is calculated at the end of the year, i.e. March 31, on the opening balance of the previous year.  i.e. For March 31, 2006, interest is calculated on the opening balance in the loan account as on April 1, 2005. This means, you will not get rebate of interest on the principal portion of EMI’s paid during the year from April 1, 2005 to March 31, 2006. In effect, you will be paying more interest as compared to interest calculated on monthly reducing balance.
2. Monthly Rest:
This means that the interest is calculated on the monthly reducing balance in your loan account. When you are paying EMIs, the EMI  amount has a portion of Principal amount, which will go in reduction of your principal amount every month.  To that extent, your interest burden will be reduced.
The difference between the Annual Rest method and monthly rest method will work out to  roughly 0.25% (Annual rest will be costlier by 0.25% on an average)
Banks advertise that they are calculating interest on daily rest. This has no additional benefit, since you will be paying the EMI on monthly basis, and not on daily basis.
Other Charges: The charges prescribed for various activities are now given in the Fair Practice Code. The activities where charges will be attracted are:
Processing and Administration Charges. (Some institutions collect the charges in advance (with a clause non refundable) just handing over to you a letter of sanction with a clause that it is subject to legal and technical favourable report. Subsequently, if for any reason, the loan is not disbursed, the charges are not refunded. )
Legal Scrutiny Charges (in some cases this is included under item 1).
Charges for switching from Fixed Rate to Floating Rate and vice versa.
Cheque return charges
Penal interest – for late payment of EMI/PEMI
Pre closure charges. (i.e. When you pay in lump sum the balance outstanding in the account in order to close the account prior to the agreed period)
Charges for duplicate statement – duplicate income tax claim certificate for interest (you will get normal statement of account every year, along with IT claim certificate free of cost)
Quantum of loan amount:
The quantum of loan amount is arrived at by each institution as per their Rules, taking into account
Your + co-applicant’s repayment capacity. (normally 50% of your gross take home  pay and in case there are more deduction, 50% of your net take home pay) is considered as the maximum EMI which you can comfortably repay. Some institutions restrict it to 40% and some go up to 60% also.) This is called the ‘Income Instalment Ratio’. It is always better to restrict this to somewhere between 40% to 50% of your net take home pay so that the remaining 60% or 50% will be available for your day-to-day maintenance of family.
The value of property, (i.e. the price mentioned in the sale deed/agreement to buy plus registration and stamp papers charges) which you wish to acquire and the margin  money to be contributed by you. Generally the margin required is 25%. Here also some institutions are satisfied with 15% margin  (i.e. they are prepared to lend up to 85% of the value of property).
Whichever is lowest of 1& 2 will be your eligible loan amount.
While going for a housing loan, you should not borrow beyond your repayment capacity, which will result in non-payment of instalments or delayed payment of instalments, which in turn will also make your home loan account a non performing asset. Once the account becomes NPA, the financing institution gets the right to proceed under the Recovery Act (Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002) which process would also include, taking possession of your house after due notice and to sell by public auction or private sale.
Copies of loan documents executed:
You must  obtain copies of loan documents and all papers signed and keep them in records. Similarly for the original title deeds deposited with the institution, you must get an acknowledgement and keep in records.
Grievance Redressal:
After taking the housing loan, if one has a grievance against the Financial Institution,  a Grievance Redressal Mechanism has been set up by each institution as per directions of RBI and NHB and you may refer and take steps accordingly. If, in case, you are not satisfied with the final outcome/disposal of the complaint by the institution, you may take legal recourse as advised by your Advocate.
The author is the Managing Director of DHFL Vysya Housing Finance Ltd.