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

One example of passive income is the gain realized from a rental property that is owned by investors who are not actively involved in managing the property. Another illustration is a dividend-producing stock that pays an annual percentage. While an investor should purchase the inventory to see the passive income, no other effort is required. .

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Residual income is a number that banks often calculate when determining whether applicants can manage a mortgage. To compute 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's left after the subtractions are performed is considered residual income. .

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

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