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Passive income is money that's earned from an enterprise that has little or no ongoing effort involved. Residual income is not actually a type of income, but rather a calculation which determines 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 home that is owned by investors who are not actively involved in managing the house. Another illustration is a dividend-producing stock that pays an annual percentage. While an investor should purchase the inventory to realize 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 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'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 particular area to determine whether the individual's budget is too tight to handle a mortgage. For instance, an applicant that lives 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 a loan backed by the Veteran's Administration. .

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