Income
Residual Income: Definition & Example
What Is Residual Income?
Residual income is the money left over each month after paying major obligations such as housing, debt payments, taxes, and basic living costs. The term also refers to passive income that keeps arriving after the initial work.
What does residual income mean?
In lending, residual income is best known from VA home loans. The VA requires borrowers to have a minimum amount left each month after the new mortgage payment, other debts, taxes, and estimated maintenance and utilities. The required amount depends on family size and region.
Residual income can give a clearer picture than a ratio alone. A high-income household may have a high debt-to-income ratio and still have plenty left over, while a lower-income household with a modest ratio may have very little.
In personal finance, residual income is also used to mean passive income, such as royalties, rental income, or subscription revenue that continues with little ongoing effort.
Residual income example
A family of four earns $7,500 per month gross. After taxes ($1,300), the new mortgage payment ($2,100), car and student loan payments ($650), and estimated maintenance and utilities ($350), they have $3,100 in residual income. That is above the VA’s minimum for their family size and region.
Related terms
- Disposable IncomeDisposable income is the money a person has available to spend or save after income taxes are paid. It is sometimes confused with discretionary income, which is what remains after necessities too.
- Debt-to-Income RatioDebt-to-income ratio (DTI) is the percentage of a person’s gross monthly income that goes toward monthly debt payments, including housing, car loans, student loans, and minimum credit card payments.
- Net IncomeNet income is what remains after deductions. For a person, it is take-home pay after taxes and withholdings. For a business, it is profit after all expenses.
- Compensating FactorsCompensating factors are strengths in an application, such as large savings, long job history, or low payment shock, that can offset a weakness like a high debt-to-income ratio or thin credit.
Residual income FAQ
- How is residual income different from disposable income?
- Disposable income is income after taxes. Residual income goes further and also subtracts housing, debt payments, and living costs.
