COMPANY'S SUBSEQUENT TRANSFER INSTRUMENT

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

          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 Company does hereby sell, transfer, assign,
set over and convey to the Issuer, without recourse, (i) 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 Issuer pursuant to
the terms of this Company's Instrument and (ii) all of its right,
title and interest in and to the Seller's Subsequent Transfer
Instrument, dated as of June 18, 1998 (the "Seller's
Instrument"), between the Seller and the Company.  The Company,
contemporaneously with the delivery of this Company's Instrument,
has delivered or caused to be delivered to the Indenture Trustee
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 Issuer by the Company of the
Subsequent Mortgage Loans identified on the attached Mortgage
Loan Schedule shall be absolute and is intended by the Company,
the Issuer, the Indenture Trustee and the Bondholders to
constitute and to be treated as a sale by the Company.

          The parties hereto intend that the transactions set
forth herein constitute a sale by the Company to the Issuer on
the Subsequent Transfer Date of all the Company'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 Company hereby grants to the Issuer as of the Subsequent
Transfer Date a security interest in all of the Company's right,
title and interest in, to and under the Subsequent Mortgage
Loans, and such other property, to secure all of the Company's
obligations hereunder, and this Company's Instrument shall
constitute a security agreement under applicable law, and in such
event, the parties hereto 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 Issuer. 
The Company 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 Delaware 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 Company or the filing of any additional UCC-1
financing statements due to the change in the principal office of
the Company, as are necessary to perfect and protect the
interests of the Issuer 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 Company's Instrument and such
other items required under the Mortgage Loan Purchase Agreement
shall be borne by the Company.

          Section 2.     Representations and Warranties;
Conditions Precedent.

          (a)  The Company hereby affirms the representations and
warranties set forth in Section 3.2 of the Mortgage Loan Purchase
Agreement that relate to the Company as of the date hereof. 

          (b)  The Company 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 Company'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 Company 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
Company's Instrument shall control over the conflicting
provisions of the Mortgage Loan Purchase Agreement.

          Section 3.     Grant from Issuer to Indenture Trustee.

          The Issuer hereby Grants as of the Subsequent Transfer
Date to the Indenture Trustee, as trustee for the benefit of the
Bondholders and the Bond Insurer, to secure all of the Issuer's
obligations under the Indenture, all of the Issuer's right, title
and interest in and to, whether now existing or hereafter
created, (a) the Subsequent Mortgage Loans and the proceeds
thereof and all rights under the Related Documents (including the
related Mortgage Files); (b) all funds on deposit from time to
time in the Collection Account allocable to the Subsequent



<PAGE> 



Mortgage Loans, excluding any investment income from such funds;
(c) all its rights under the Seller's Instrument and this
Company's Instrument; and (d) all present and future claims,
demands, causes and choses in action in respect of any or all of
the foregoing and all payments on or under, and all proceeds of
every kind and nature whatsoever in respect of, any or all of the
foregoing and all payments on or under, and all proceeds of every
kind and nature whatsoever in the conversion thereof, voluntary
or involuntary, into cash or other liquid property, all cash
proceeds, accounts, accounts receivable, notes, drafts
acceptances, checks, deposit accounts, rights to payment of any
and every kind, and other forms of obligations and receivables,
instruments and other property which at any time constitute all
or part of or are included in the proceeds of any of the
foregoing.

          Section 4.     Recordation of Instrument.

          To the extent permitted by applicable law, this
Company'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 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 5.     Governing Law.

          This Company'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 6.     Counterparts.

          This Company'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 7.     Successors and Assigns.

          This Company's Instrument shall inure to the benefit of
and be binding upon the Company and the Issuer 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 Company's Instrument as of the day and year
first written above.

                              NOVASTAR MORTGAGE FUNDING
                              CORPORATION,
                                 as Company


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


                              NOVASTAR MORTGAGE FUNDING TRUST,
                              SERIES 1998-1,
                                 as Issuer

                              By:       WILMINGTON TRUST COMPANY,
                                        not in its individual
                                        capacity, but solely in
                                        its capacity as Owner
                                        Trustee


                                 By: /s/ Denise M. Geran
                                 Name:  Denise M. Geran
                                 Title:  Financial Services Officer

Acknowledged and Accepted:

FIRST UNION NATIONAL BANK,
   as Indenture Trustee


By: /s/ Robin M. Belanger
Name: Robin M. Belanger
Title:  Vice President