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Passive income is money that is earned from an enterprise that has little or no ongoing effort involved. Residual income is not really a type of income, but rather a calculation that determines just how much discretionary money an individual has available to spend after most monthly bills are paid.

One example of passive income is the profit realized from a rental property that is owned by investors that are not actively involved in managing the house. Another illustration is a dividend-producing inventory that pays an annual percentage. While an investor must buy the inventory to realize the passive income, no additional effort is demanded. .

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Residual income is a number that banks often calculate when determining whether applicants can afford a mortgage. To calculate residual income, the bank determines the applicant's income, and then subtracts the anticipated mortgage, property insurance and taxes. Any monthly payments made to credit cards, installment accounts or student loans are also subtracted from income.

The amount that is left after the subtractions are done is considered residual income. .

Banks compare an applicant's residual income into the price of living in a special area to determine whether the individual's budget is too tight to handle a mortgage. For instance, an applicant who lives in the South and has a family of four needs to have a residual income of $1,003 per month when he wants to take a loan backed by the Veteran's Administration. .

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