SELLER'S SUBSEQUENT TRANSFER INSTRUMENT


          Pursuant to this Seller's Subsequent Transfer
Instrument (the "Seller's Instrument"), dated as of  June 18,
1998, between NovaStar Financial, Inc. as seller (the "Seller"),
and NovaStar Mortgage Funding Corporation, as company (the
"Company"), and pursuant to the Mortgage Loan Purchase Agreement,
dated as of April 1, 1998 (the "Mortgage Loan Purchase
Agreement"), among the Seller, the Company, NovaStar Mortgage
Funding Trust, Series 1998-1, as issuer (the "Issuer"), and First
Union National Bank, as indenture trustee (the "Indenture
Trustee"), the Seller and the Company agree to the sale by the
Seller and the purchase by the Company of the subsequent Mortgage
Loans listed on the attached Mortgage Loan Schedule (the
"Subsequent Mortgage Loans").

          Capitalized terms used and not defined herein have
their respective meanings as set forth in the definitions
contained in Appendix A to the Indenture, dated as of April 1,
1998 (the "Indenture"), between the Issuer and the Indenture
Trustee, which definitions are incorporated by reference herein. 
All other capitalized terms used herein shall have the meanings
specified herein.

          Section 1.     Conveyance of Subsequent Mortgage Loans.

          (a)  The Seller does hereby sell, transfer, assign, set
over and convey to the Company, without recourse, all of its
right, title and interest in and to the Subsequent Mortgage
Loans, all scheduled payments of principal and interest on the
Subsequent Mortgage Loans due after the Subsequent Cut-off Date,
and all other payments of principal and interest on the
Subsequent Mortgage Loans collected after the Subsequent Cut-off
Date (minus that portion of any such payment which is allocable
to the period prior to the Subsequent Cut-off Date); provided,
however, that no scheduled payments of principal and interest due
on or before the Subsequent Cut-off Date and collected after the
Subsequent Cut-off Date shall belong to the Company pursuant to
the terms of this Seller's Instrument.  The Seller,
contemporaneously with the delivery of this Seller's Instrument,
has delivered or caused to be delivered to the Indenture Trustee,
at the direction of the Company, each item set forth in Section
2.1(b) of the Mortgage Loan Purchase Agreement with respect to
such Subsequent Mortgage Loans.  The transfer to the Company by
the Seller of the Subsequent Mortgage Loans identified on the
attached Mortgage Loan Schedule shall be absolute and is intended
by the Seller, the Company, the Indenture Trustee and the
Bondholders to constitute and to be treated as a sale by the
Seller.

          The parties hereto intend that the transactions set
forth herein constitute a sale by the Seller to the Company on
the Subsequent Transfer Date of all the Seller's right, title and
interest in and to the Subsequent Mortgage Loans, and other
property as and to the extent described above.  In the event the
transactions set forth herein shall be deemed not to be a sale,
the Seller hereby grants to the Company as of the Subsequent
Transfer Date a security interest in all of the Seller's right,
title and interest in, to and under the Subsequent Mortgage
Loans, and such other property, to secure all of the Seller's
obligations hereunder, and this Agreement shall constitute a
security agreement under applicable law, and in such event, the
parties hereto <PAGE> acknowledge that the Indenture Trustee, in
addition to holding the Subsequent Mortgage Loans for the benefit
of the Bondholders and the Bond Insurer, holds the Subsequent
Mortgage Loans as designee and agent of the Company.  The Seller
agrees to take or cause to be taken such actions and to execute
such documents, including without limitation the filing of all
necessary UCC-1 financing statements filed in the State of
Maryland and the State of Kansas (which shall be submitted for
filing as of the Subsequent Transfer Date), any continuation
statements with respect thereto and any amendments thereto
required to reflect a change in the name or corporate structure
of the Seller or the filing of any additional UCC-1 financing
statements due to the change in the principal office of the
Seller, as are necessary to perfect and protect the interests of
the Company and its assignees in each Subsequent Mortgage Loan
and the proceeds thereof.

          (b)  The expenses and costs relating to the delivery of
the Subsequent Mortgage Loans, this Seller's Instrument and such
other items required under the Mortgage Loan Purchase Agreement
shall be borne by the Seller.

          (c)  Additional terms of the sale are set forth on
Attachment A hereto.

          Section 2.     Representations and Warranties;
Conditions Precedent.

          (a)  The Seller hereby affirms the representations and
warranties set forth in Section 3.1 of the Mortgage Loan Purchase
Agreement that relate to the Seller and the Subsequent Mortgage
Loans as of the date hereof.  The Seller hereby confirms that
each of the conditions set forth in Section 2.2(b) of the
Mortgage Loan Purchase Agreement are satisfied as of the date
hereof and further represents and warrants that each Subsequent
Mortgage Loan complies with the requirements of this Seller's
Instrument and Section 2.2(c) of the Mortgage Loan Purchase
Agreement.

          (b)  The Seller is solvent, is able to pay its debts as
they become due and has capital sufficient to carry on its
business and its obligations hereunder; it will not be rendered
insolvent by the execution and delivery of this Seller's
Instrument or by the performance of its obligations hereunder nor
is it aware of any pending insolvency; no petition of bankruptcy
(or similar insolvency proceeding) has been filed by or against
the Seller prior to the date hereof;
 
          (c)  All terms and conditions of the Mortgage Loan
Purchase Agreement are hereby ratified and confirmed; provided,
however, that in the event of any conflict the provisions of this
Seller's Instrument shall control over the conflicting provisions
of the Mortgage Loan Purchase Agreement.

          Section 3.     Recordation of the Seller's Instrument.

          To the extent permitted by applicable law, this
Seller's Instrument, or a memorandum thereof if permitted under
applicable law, is subject to recordation in all appropriate
public offices for real property records in all of the counties
or other comparable jurisdictions in <PAGE> which any or all of the
properties subject to the Mortgages are situated, and in any
other appropriate public recording office or elsewhere, such
recordation to be effected by the Servicer, but only when
accompanied by an Opinion of Counsel to the effect that such
recordation materially and beneficially affects the interests of
the Bondholders or is necessary for the administration or
servicing of the Mortgage Loans.

          Section 4.     Governing Law.

          This Seller's Instrument shall be construed in
accordance with the laws of the State of New York and the
obligations, rights and remedies of the parties hereunder shall
be determined in accordance with such laws, without giving effect
to principles of conflicts of law.

          Section 5.     Counterparts.

          This Seller's Instrument may be executed in one or more
counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to
be an original; such counterparts, together, shall constitute one
and the same instrument.

          Section 6.     Successors and Assigns.

          This Seller's Instrument shall inure to the benefit of
and be binding upon the Seller and the Company and their
respective successors and assigns.  The Bond Insurer and the
Indenture Trustee shall be express third party beneficiaries
hereto.

<PAGE> 


          IN WITNESS WHEREOF, the parties hereto have executed
and delivered this Seller's Instrument as of the day and year
first written above.

                                   NOVASTAR FINANCIAL, INC.,
                                         as Seller


                                   By:   /s/ David J. Lee
                                   Name:  David J. Lee
                                   Title:  Vice President



                                   NOVASTAR MORTGAGE FUNDING
                                   CORPORATION,
                                         as Company


                                   By:  /s/ David J. Lee
                                   Name:  David J. Lee
                                   Title:  Vice President


<PAGE> 


   NOVASTAR HOME EQUITY LOAN ASSET-BACKED BONDS, SERIES 1998-1

     ATTACHMENT A TO SELLER'S SUBSEQUENT TRANSFER INSTRUMENT
                          June 18, 1998

A.   Profile of Subsequent Mortgage Loans:

     1.   Subsequent Cut-off Date:                June 1, 1998
     2.   Subsequent Transfer Date:               June 18, 1998
     3.   Aggregate Principal Balance of the 
          Subsequent Mortgage Loans as of the 
          Subsequent Cut-off Date:                $53,989,460.36
     4.   Purchase Price:                         100.00%

B.   As to all the Subsequent Mortgage Loans the subject of this
     Instrument:

     1.   Longest stated term to maturity:        360 months
     2.   Minimum Mortgage Rate:                  7.125%
     3.   Maximum Mortgage Rate:                  14.99%
     4.   WAC of all Mortgage Loans:              10.016%
     5.   WAM of all Mortgage Loans:              325.99%
     6.   Largest Principal Balance:              $650,000
     7.   Non-owner occupied Mortgaged 
          Properties:                             9.96%
     8.   California zip code concentration:      11.00%
     9.   Condominiums:                           3.86%
     10.  Single-family:                          84.64%
     11.  Weighted average term since 
          origination:                            2.32 months