Qualification Ratios are calculations used by lenders to determine a borrower's ability to repay a loan. The ratio takes into consideration a borrower's income, debt, and/or housing expenses, and measures it against the amount of debt that the borrower is capable of taking on.

The two primary qualification ratios used by lenders to assess a borrower's loan eligibility are the front-end ratio and the back-end ratio.

The front-end ratio measures a borrower’s monthly housing expenses in relation to their gross monthly income. Generally, lenders prefer to see a ratio of 28% or lower. For example, if a borrower’s gross monthly income is $3,000 – the lender will typically not approve a loan if the borrower’s monthly housing expenses exceed $840.

The back-end ratio measures a borrower’s total debt in relation to their gross monthly income. Generally, lenders prefer to see a ratio of 35% or lower. For example, if a borrower’s gross monthly income is $3,000 – the lender will typically not approve a loan if the borrower’s total monthly debt payments exceed $1,050.

In reality, a potential borrower needs to demonstrate to the lender that he or she has a low "total debt ratio". The lender must consider both the front end ratio and the back end ratio in combination. The accepted range for both ratios to obtain the best terms for a loan (lowest interest rate, no private mortgage insurance, etc.) is 33% of the gross income for the front end ratio and preferrably under 43% as a back end ratio.

Qualification ratios are just one factor that lenders take into consideration when assessing loan eligibility. Borrowers should investigate their borrowing power through different lending products and services, such as checking their credit score, assessing their debt-to-income ratio, and reviewing their credit report. Doing all of these will help the borrower gain financial insights to determine the right loan options that best suit their needs.