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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 sort of income, but rather a calculation that determines how much discretionary money an individual has available to spend after most monthly bills are paid.

One instance of passive income is the profit realized from a rental home that's owned by investors who are not actively involved in managing the property. 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 other effort is demanded. .

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Residual income is a number that banks often compute 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 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 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 that resides in the South and has a family of four must 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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