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Passive income is money that is earned from an enterprise which has no ongoing effort involved. Residual income is not really a type of income, but instead 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 that are not actively involved in managing the house. Another example is a dividend-producing inventory 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 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 taxation. Any monthly payments made to credit cards, installment accounts or student loans also are subtracted from income.

The amount that is 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 lives in the South and has a family of four must have a residual income of at least $1,003 per month when he wants to take out a loan backed by the Veteran's Administration. .

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