Update to ARM qualifying rate calculations

7/26 beta, 8/23 prod

Purpose of Update and Benefit:

Blend currently calculates the ARM qualifying rate by adding a flat 2% to the note rate. However, this may be inaccurate for certain ARM types, as the GSEs use varying calculations based on the initial term of the ARM. We are releasing this update to make the Blend ARM qualifying rate calculations more accurate. 

Current Behavior:

When the “Amortization type” is set to “Adjustable Rate” in the lender application, Blend automatically adds a 2% qualifying rate used in the DTI calculation in every case. 

New Behavior:

Blend will follow guidance from Fannie Mae when calculating the qualifying rate in DTI calculations for ARMs. The new calculation logic will read from the “Months prior to first adjustment” and “Interest rate” inputs in the Loan product section of the lender application and show the resulting calculation in the “Qualifying rate” field (note: this field is not editable, but we will follow up with a new opt-in feature in the future that will allow loan teams to edit this rate). The note in the UI will also be updated to reflect the new logic. 

The calculations are as follows: 

• If months = 12 (1 year), add 6% to the Interest rate. 

  • So if Interest rate = 5%, then qualifying rate = 11%

• If months = 36 (3 years), add 5% to the Interest rate. 

  • If Interest rate = 5%, then qualifying rate = 10%

• If months = 60 (5 years), greater of fully indexed rate* or Interest rate + 2%. 

  • If Interest rate = 5%, then qualifying rate = 7%.

• If months = 84 (7 years) or 120 (10 years), Greater of fully indexed rate* or Interest rate. 

  • If Interest rate = 5%, then qualifying rate = 5%.

• If months = any other value, Interest rate + 5%. 

  • If Interest rate = 5%, then qualifying rate = 10%.

• If months = blank, use the Interest rate and do not add a %. 

  • If Interest rate = 5%, then qualifying rate = 5%.

The Qualifying rate will be exported in the MISMO as the QualifyingRatePercent field.

*There are two components to the fully indexed rate: index rate + margin. This information is usually pulled directly from pricing engines, but not all pricing engines contain this information. We are planning future improvements that will allow us to pull the index rate and the margin from the details we receive from the pricing engines. Until that future work is complete, this release will effectively ignore the fully indexed rate, since we don't have those details.

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