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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 really a type of income, but rather a calculation which determines how much discretionary money an individual has available to spend after most 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 property. Another illustration is a dividend-producing inventory that pays an annual percentage. While an investor must purchase the stock 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 afford a mortgage. To calculate 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 done is considered residual income. .

Banks compare an applicant's residual income into the cost of living in a special area to determine whether 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 a month when he wishes to take a loan backed by the Veteran's Administration. .

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