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

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

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

Banks compare an applicant's residual income to 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 needs to have a residual income of at least $1,003 a month if he wishes to take out a loan backed by the Veteran's Administration. .

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