For QM qualifying the maximum interest rate during the first five year for a 7/1 ARM (fixed for 7 years) do we use the note rate as the QM qualifying rate since there is no adjustment within the first five years instead of the fully indexed rate?

Yes-the maximum interest rate will be your Note rate since the interest rate will not change until after the 7th year.

From 1026.43(c)(5)

(5) Payment calculation. (i) General rule. Except as provided in paragraph (c)(5)(ii) of this section, a creditor must make the consideration required under paragraph (c)(2)(iii) of this section using:

(A) The fully indexed rate or any introductory interest rate, whichever is greater; and

Ok.. so if the fully indexed rate is 3.625% with calculated DTI at 43.15% and the Note/introductory rate is 3% then using the Note rate 'within the first five years' the calculated DTI is below 43% would be QM qualified?

You have to use the fully indexed rate or the introductory rate whichever is higher.

1026.43(c)

(2) Basis for determination. Except as provided otherwise in paragraphs (d), (e), and (f) of this section, in making the repayment ability determination required under paragraph (c)(1) of this section, a creditor must consider the following:

(iii) The consumer's monthly payment on the covered transaction, calculated in accordance with paragraph (c)(5) of this section;

Thank you. Our LOS is giving a QM qualified status as it is using the note rate as the maximum rate in first five years.