<PAGE>

                                                                     EXHIBIT 4.1

                           NOVASTAR MORTGAGE, INC.,
                                   as Seller



                    NOVASTAR MORTGAGE FUNDING CORPORATION,
                                  as Company



              NOVASTAR MORTGAGE FUNDING TRUST, SERIES __________,
                                   as Issuer



                       _______________________________,
                             as Bond Administrator



                                      and



                       ________________________________,
                             as Indenture Trustee



                       MORTGAGE LOAN PURCHASE AGREEMENT

                      Dated as of ______________________



                                  relating to

               NOVASTAR MORTGAGE FUNDING TRUST, SERIES _________
         NOVASTAR HOME EQUITY LOAN ASSET-BACKED BONDS, SERIES ________
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
ARTICLE I Definitions.....................................................

  Section 1.01 Definitions................................................

ARTICLE II Sale Of Mortgage Loans And Related Provisions..................

  Section 2.01 Sale of Initial Mortgage Loans.............................
  Section 2.02 Conveyance of the Subsequent Mortgage Loans................
  Section 2.03 Pre-Funding Account........................................
  Section 2.04 Interest Coverage Account..................................

ARTICLE III Representations And Warranties; Remedies For Breach...........

  Section 3.01 Seller Representations and Warranties......................
  Section 3.02 Company Representations and Warranties.....................

ARTICLE IV Seller's Covenants.............................................

  Section 4.01 Covenants of the Seller....................................
  Section 4.02 Payment of Expenses........................................

ARTICLE V Conditions To Initial Mortgage Loan Purchase....................

  Section 5.01 Conditions of Company's Obligations........................

ARTICLE VI Indemnification By The Seller With Respect To The Mortgage
  Loans...................................................................

  Section 6.01 Indemnification With Respect to the Mortgage Loans.........
  Section 6.02 Limitation on Liability of the Seller......................

ARTICLE VII Termination...................................................

  Section 7.01 Termination................................................

ARTICLE VIII Miscellaneous Provisions.....................................

  Section 8.01 Amendment..................................................
  Section 8.02 Governing Law..............................................
  Section 8.03 Notices....................................................
  Section 8.04 Severability of Provisions.................................
  Section 8.05 Relationship of Parties....................................
  Section 8.06 Counterparts...............................................
  Section 8.07 Further Agreements.........................................
  Section 8.08 Intention of the Parties...................................
  Section 8.09 Successors and Assigns; Assignment of Purchase Agreement...
  Section 8.10 Survival...................................................
  Section 8.11 Third Party Beneficiary....................................
  Section 8.12 Limitation of Liability....................................
</TABLE>

                                       i
<PAGE>

          THIS MORTGAGE LOAN PURCHASE AGREEMENT, dated as of
____________________ (this "Purchase Agreement"), is made among NovaStar
Mortgage, Inc. (the "Seller"), NovaStar Mortgage Funding Corporation (the
"Company"), NovaStar Mortgage Funding Trust, Series ________ (the "Issuer"),
________________________ (the "Bond Administrator") and
_________________________ (the "Indenture Trustee").

                               WITNESSETH THAT:

          WHEREAS, pursuant to the terms of this Purchase Agreement, the Seller
will sell the Initial Mortgage Loans and the related MI Policies to the Company
on the Closing Date;

          WHEREAS, pursuant to the terms of the Trust Agreement, the Company
will sell the Initial Mortgage Loans and the related MI Policies, and assign all
of its rights under the Purchase Agreement, to the Issuer, without recourse, on
the Closing Date;

          WHEREAS, pursuant to the terms of the Indenture, the Issuer will
pledge the Initial Mortgage Loans and the related MI Policies, and assign all of
its rights under the Purchase Agreement, to the Indenture Trustee on the Closing
Date;

          WHEREAS, pursuant to the terms of the Indenture, the Issuer will
issue, and transfer to or at the direction of the Issuer, the Class A Bonds and
the Subordinated Bonds;

          WHEREAS, pursuant to the terms of the Trust Agreement, the Issuer will
transfer to the Company the Class A Bonds, the Subordinated Bonds and the
Certificates;

          WHEREAS, pursuant to the terms of the Underwriting Agreement, the
Company will sell the Class A Bonds to the Underwriter;

          WHEREAS, pursuant to the terms of the Servicing Agreement, the
Servicer will service the Mortgage Loans; and

          WHEREAS, pursuant to the terms of the Converted Loan Purchase
Agreement, the Converted Loan Purchaser will purchase the Converted Mortgage
Loans from the Issuer.

                                   ARTICLE I

                                  DEFINITIONS

Section 1.01  Definitions.
              -----------

          For all purposes of this Purchase Agreement, except as otherwise
expressly provided herein or unless the context otherwise requires, capitalized
terms not otherwise defined herein shall have the meanings assigned to such
terms in the Definitions contained in Appendix A to the Indenture dated as of
_________________ among the Issuer, the Bond Administrator and the Indenture
Trustee, which is incorporated by reference herein. All other capitalized terms
used herein shall have the meanings specified herein.
<PAGE>

                                  ARTICLE II

                 SALE OF MORTGAGE LOANS AND RELATED PROVISIONS

          Section 2.01  Sale of Initial Mortgage Loans.
                        ------------------------------

          (a)  The Seller hereby sells, and the Company hereby purchases on the
Closing Date, the Initial Mortgage Loans identified (and the related MI
Policies) on the Mortgage Loan Schedule annexed hereto as Exhibit 1, the
proceeds thereof and all rights under the Related Documents (including the
related Mortgage Files).  The Initial Mortgage Loans consist of four groups of
conventional, residential first lien mortgage loans segregated into groups of
fixed and adjustable interest rates. The Initial Mortgage Loans will have a
Principal Balance as of the close of business on the Cut-off Date, after giving
effect to any payments due on or before such date whether or not received, of
approximately $__________________.  The sale of the Initial Mortgage Loans will
take place on the Closing Date, subject to and simultaneously with the deposit
of the Initial Mortgage Loans and the Original Pre-Funded Amount and the
Interest Coverage Amount into the Trust Estate, the issuance of the Securities
by the Issuer and the sale of the Class A Bonds pursuant to the Underwriting
Agreement. The purchase price (the "Purchase Price") for the Initial Mortgage
Loans to be paid by the Company to the Seller on the Closing Date shall consist
of the following:

               (i)  a payment in an amount equal to $________________
representing the net proceeds of the sale of the Class A Bonds, which payment
shall be paid to the Seller by wire transfer in immediately available funds on
the Closing Date by or on behalf of the Company, or as otherwise agreed by the
Company; and

               (ii) a payment in an amount equal to $________________
representing the proceeds of the sale of the Subordinated Bonds by the Company
to NRFC pursuant to the REMIC Interests Sale Agreement, which payment shall be
paid to the Seller by wire transfer in immediately available funds on the
Closing Date by or on behalf of the Company, or as otherwise agreed by the
Company.

          (b)  In connection with such conveyances by the Seller, the Seller
shall on behalf of and at the direction of the Company deliver to, and deposit
with the Bond Administrator on behalf of the Indenture Trustee, on or before the
Closing Date in the case of an Initial Mortgage Loan, and two Business Days
prior to the related Subsequent Transfer Date in the case of a Subsequent
Mortgage Loan, the following documents or instruments with respect to each
Mortgage Loan (the "Mortgage File"):

               (i)  the original Mortgage Note endorsed to
"____________________, as Indenture Trustee pursuant to the Indenture dated as
of _________________, relating to the NovaStar Home Equity Loan Asset-Backed
Bonds, Series ________";

               (ii) the original Mortgage with evidence of recording thereon,
or, if the original Mortgage has not yet been returned from the public recording
office, a copy of the

                                       2
<PAGE>

original Mortgage certified by the Seller or the public recording office in
which such original Mortgage has been recorded;

               (iii)  an original assignment (which may be included in one or
more blanket assignments if permitted by applicable law) of the Mortgage
endorsed to "_________________________, as Indenture Trustee pursuant to the
Indenture dated as of ______________, relating to the NovaStar Home Equity Loan
Asset-Backed Bonds, Series ________", and otherwise in recordable form;

               (iv)   originals of any intervening assignments of the Mortgage,
with evidence of recording thereon, or, if the original of any such intervening
assignment has not yet been returned from the public recording office, a copy of
such original intervening assignment certified by the Seller or the public
recording office in which such original intervening assignment has been
recorded;

               (v)    the original policy of title insurance (or a commitment
for title insurance, if the policy is being held by the title insurance company
pending recordation of the Mortgage);

               (vi)   with respect to each Mortgage Loan insured by a MI Policy,
a certificate of insurance or other evidence of such MI Policy;

               (vii)  a true and correct copy of each assumption, modification,
consolidation or substitution agreement, if any, relating to the Mortgage Loan;
and

               (viii) an executed copy of the notice of assignment and
acknowledgement of assignment with respect to the Mortgage Loans covered by the
MI Policies.

          If a material defect in any Mortgage File is discovered which may
materially and adversely affect the value of the related Mortgage Loan, or the
interests of the Indenture Trustee (as pledgee of the Mortgage Loans), the
Bondholders, the Certificateholders or the Bond Insurer in such Mortgage Loan,
including if any document required to be delivered to the Bond Administrator has
not been delivered (provided that a Mortgage File will not be deemed to contain
a defect for an unrecorded assignment under clause (iii) above for 180 days
following submission of the assignment if the Seller has submitted such
assignment for recording pursuant to the terms of the following paragraph), the
Seller shall cure such defect, repurchase the related Mortgage Loan at the
Repurchase Price or substitute an Eligible Substitute Mortgage Loan for the
related Mortgage Loan upon the same terms and conditions set forth in Section
3.01 hereof as to the Initial Mortgage Loans and the Subsequent Mortgage Loans
and Section 2.02(c) hereof as to the Subsequent Mortgage Loans for breaches of
representations and warranties.

          Promptly after the Closing Date in the case of an Initial Mortgage
Loan or, in the case of a Subsequent Mortgage Loan, promptly after the
Subsequent Transfer Date (or after the date of transfer of any Eligible
Substitute Mortgage Loan), the Seller at its own expense shall complete and
submit for recording in the appropriate public office for real property records
each of the assignments referred to in clause (iii) above, with such assignment
completed in favor of

                                       3
<PAGE>

the Indenture Trustee. While such assignment to be recorded is being recorded,
the Bond Administrator shall retain a photocopy of such assignment. If any
assignment is lost or returned unrecorded to the Bond Administrator because of
any defect therein, the Seller is required to prepare a substitute assignment or
cure such defect, as the case may be, and the Seller shall cause such substitute
assignment to be recorded in accordance with this paragraph.

          In instances where an original Mortgage or any original intervening
assignment of Mortgage is not, in accordance with clause (ii) or (iv) above,
delivered by the Seller to the Bond Administrator, on behalf of the Indenture
Trustee, prior to or on the Closing Date in the case of an Initial Mortgage Loan
or, in the case of a Subsequent Mortgage Loan, prior to or on the Subsequent
Transfer Date, the Seller will deliver or cause to be delivered the originals of
such documents to the Bond Administrator, on behalf of the Indenture Trustee,
promptly upon receipt thereof.

          Effective on the Closing Date, the Company hereby acknowledges its
acceptance of all right, title and interest to the Initial Mortgage Loans and
other property, existing on the Closing Date and thereafter created and conveyed
to it pursuant to this Section 2.01.

          The Indenture Trustee, as assignee or transferee of the Company, shall
be entitled to all scheduled principal payments due after the Cut-off Date, all
other payments of principal due and collected after the Cut-off Date, and all
payments of interest on the Initial Mortgage Loans. No scheduled payments of
principal due on or before the Cut-off Date and collected after the Cut-off Date
shall belong to the Company pursuant to the terms of this Purchase Agreement.
The Servicing Agreement shall provide that any late payment charges collected in
connection with a Mortgage Loan shall be paid to the Servicer as provided
therein.

          (c)  The parties hereto intend that the transactions set forth herein
constitute a sale by the Seller to the Company on the Closing Date of all the
Seller's right, title and interest in and to the Initial 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 Closing Date a security interest in all
of the Seller's right, title and interest in, to and under the Initial Mortgage
Loans and such other property, to secure all of the Seller's obligations
hereunder, and this Purchase Agreement shall constitute a security agreement
under applicable law and in such event, the parties hereto acknowledge that the
Bond Administrator, in addition to holding the Initial Mortgage Loans on behalf
of the Indenture Trustee for the benefit of the Bondholders and the Bond
Insurer, holds the Initial Mortgage Loans as designee 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 Virginia and the State of Kansas
(which shall have been submitted for filing as of the Closing Date and each
Subsequent Transfer Date, as applicable), 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 Initial Mortgage Loan and the proceeds thereof and the
interests of the Issuer and its assignees in each Subsequent Mortgage Loan and
the proceeds thereof.

                                       4
<PAGE>

Section 2.02  Conveyance of the Subsequent Mortgage Loans.
              -------------------------------------------

              (a)  Subject to the conditions set forth in paragraph (b) below in
consideration of the Issuer's delivery on the related Subsequent Transfer Dates
of all or a portion of the balance of funds in the Pre-Funding Account, the
Seller shall on any Subsequent Transfer Date sell, transfer, assign, set over
and convey, without recourse, to the Company, who shall then sell, transfer,
assign, set over and convey, without recourse, to the Issuer, but subject to the
other terms and provisions of this Purchase Agreement, all of the right, title
and interest of the Seller in and to (i) the Subsequent Mortgage Loans
identified on the related Mortgage Loan Schedule attached to the related
Subsequent Transfer Instrument delivered by the Seller on such Subsequent
Transfer Date, (ii) principal due and interest accruing on the Subsequent
Mortgage Loans after the related Subsequent Cut-off Date and (iii) with respect
to such Subsequent Mortgage Loans all items to be delivered pursuant to Section
2.01(b) above and the other items in the related Mortgage Files; provided,
however, that the Seller reserves and retains all right, title and interest in
and to principal received and interest accruing on the Subsequent Mortgage Loans
prior to the related Subsequent Cut-off Date.  The transfer by the Seller to the
Company, and by the Company to the Issuer, of the Subsequent Mortgage Loans
identified on each Mortgage Loan Schedule attached to the related Subsequent
Transfer Instrument shall be absolute and is intended by the Issuer, the Company
and the Seller to constitute and to be treated as a sale of the Subsequent
Mortgage Loans by the Seller to the Company, and a sale of the Subsequent
Mortgage Loans by the Company to the Issuer.

              In the event such transactions shall be deemed not to be a sale,
the Seller hereby grants to the Company as of each Subsequent Transfer Date a
security interest in all of the Seller's right, title and interest in, to and
under the related Subsequent Mortgage Loans and such other property, to secure
all of the Seller's obligations hereunder, and this Purchase Agreement shall
constitute a security agreement under applicable law, and in such event, the
parties hereto acknowledge that the Bond Administrator, in addition to holding
the Subsequent Mortgage Loans and the related MI Policies on behalf of the
Indenture Trustee for the benefit of the Bondholders and the Bond Insurer, holds
the Subsequent Mortgage Loans and the related MI Policies as designee 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 Virginia and the State of
Kansas (which shall be submitted for filing as of the related 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 the Subsequent Mortgage Loans.

              In the event such transactions shall be deemed not to be a sale,
the Company hereby grants to the Issuer as of each Subsequent Transfer Date a
security interest in all of the Company's right, title and interest in, to and
under the related Subsequent Mortgage Loans and such other property, to secure
all of the Company's obligations hereunder, and this Purchase Agreement shall
constitute a security agreement under applicable law, and in such event, the
parties hereto acknowledge that the Bond Administrator, in addition to holding
the Subsequent Mortgage Loans on behalf of the Indenture Trustee for the benefit
of the Bondholders and the

                                       5
<PAGE>

Bond Insurer, holds the Subsequent Mortgage Loans as designee 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 related 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 subsequent Mortgage
Loans.

          The related Mortgage File for each Subsequent Mortgage Loan shall be
delivered to the Bond Administrator, on behalf of the Indenture Trustee, two
Business Days prior to the related Subsequent Transfer Date.

          The Issuer on each Subsequent Transfer Date shall acknowledge its
acceptance of all right, title and interest to the related Subsequent Mortgage
Loans and other property, existing on the Subsequent Transfer Date and
thereafter created, conveyed to it pursuant to this Section 2.02.

          The Indenture Trustee, as assignee of the Issuer, shall be entitled to
all scheduled principal payments due after each Subsequent Cut-off Date, all
other payments of principal due and collected after each related Subsequent Cut-
off Date, and all payments of interest on the Subsequent Mortgage Loans, minus
that portion of any such payment which is allocable to the period prior to the
related Subsequent Cut-off Date. No scheduled payments of principal due on or
before the related Subsequent Cut-off Date and collected after the related
Subsequent Cut-off Date shall belong to the Issuer pursuant to the terms of this
Purchase Agreement.

          The purchase price paid by the Bond Administrator, at the direction of
the Issuer, from amounts released from the Pre-Funding Account shall be one-
hundred percent (100%) of the aggregate Principal Balances of the Subsequent
Mortgage Loans so transferred (as identified on the Mortgage Loan Schedule
attached to the related Subsequent Transfer Instrument provided by the Seller).

          (b)   The Seller shall transfer to the Company, who shall transfer to
the Issuer, the Subsequent Mortgage Loans and the other property and rights
related thereto described in Section 2.02(a) above, and the Issuer shall cause
to be released funds from the related Pre-Funding Account, only upon the
satisfaction of each of the following conditions on or prior to the related
Subsequent Transfer Date:

               (i)  the Seller shall have provided the Company, who shall have
provided the Issuer, and the Issuer shall have provided the Bond Administrator,
the Indenture Trustee, and the Bond Insurer, with a timely Addition Notice,
which notice shall be given no fewer than six Business Days prior to the related
Subsequent Transfer Date and shall designate the Subsequent Mortgage Loans to be
sold to the Company and then to the Issuer and the aggregate Principal Balances
of such Subsequent Mortgage Loans as of the related Subsequent

                                       6
<PAGE>

Cut-off Date and any other information reasonably requested by the Bond
Administrator or the Bond Insurer with respect to the Subsequent Mortgage Loans;

               (ii)  the Seller shall have delivered to the Company, who shall
have delivered to the Issuer, who shall have delivered to the Bond
Administrator, the Indenture Trustee, and the Bond Insurer, a duly executed
Subsequent Transfer Instrument substantially in the form of Exhibit 2(A) or
2(B), as applicable, (A) confirming the satisfaction of each condition precedent
and representations specified in this Section 2.02(b), Section 2.02(c) and in
the related Subsequent Transfer Instrument and (B) including a Mortgage Loan
Schedule attached thereto listing the Subsequent Mortgage Loans;

               (iii) as of each Subsequent Transfer Date, as evidenced by
delivery of the Seller's Subsequent Transfer Instrument in the form of Exhibit
2(A) and the Company's Subsequent Transfer Instrument is the form of Exhibit
2(B), neither the Seller nor the Company shall be insolvent or have been made
insolvent by such transfers, nor shall they be aware of any pending insolvency;

               (iv)  such sale and transfer shall not result in a material
adverse tax consequence to the Issuer or the Securityholders;

               (v)   the Funding Period shall not have terminated;

               (vi)  the Bond Insurer shall have delivered to the Issuer an
Officer's Certificate confirming that the Subsequent Mortgage Loans are
acceptable to the Bond Insurer; and

               (vii) the Seller shall have delivered to the Bond Administrator,
the Indenture Trustee, the Bond Insurer and the Rating Agencies Opinions of
Counsel addressed to the Bond Insurer, the Rating Agencies, the Indenture
Trustee and the Bond Administrator with respect to the transfers of the
Subsequent Mortgage Loans substantially in the form of the Opinion of Counsel
delivered to the Bond Insurer, the Bond Administrator, the Indenture Trustee and
the Rating Agencies on the Closing Date (1) regarding certain corporate matters
and (2) confirming the existence of a true sale.

          (c)  The obligation of the Issuer to purchase a Subsequent Mortgage
Loan on any Subsequent Transfer Date is subject to the following conditions: (1)
each such Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the related Subsequent Transfer Instrument and this
Purchase Agreement; (2) the Seller shall not select such Subsequent Mortgage
Loans in a manner that it reasonably believes is adverse to the interests of the
Bondholders or the Bond Insurer; (3) the Seller shall have delivered certain
Opinions of Counsel required pursuant to Section 2.02(b)(vii) hereof; (4) as of
each Subsequent Cut-off Date the Subsequent Mortgage Loans will satisfy the
following criteria: (i) such Subsequent Mortgage Loan shall not be 30 or more
days contractually delinquent as of the related Subsequent Cut-off Date; (ii)
the remaining stated term to maturity of such Subsequent Mortgage Loan shall not
exceed 360 months; (iii) the lien securing any such Subsequent Mortgage Loan
must be first priority; (iv) such Subsequent Mortgage Loan must have an
outstanding Principal Balance of at

                                       7
<PAGE>

least $_________ as of the Subsequent Cut-off Date; (v) such Subsequent Mortgage
Loan will be underwritten in accordance with the Underwriting Guidelines; (vi)
such Subsequent Mortgage Loan must have a Loan-to-Value Ratio of no more than
_______%; (vii) the stated maturity of such Subsequent Mortgage Loan will be no
later than ________________; (viii) such Subsequent Mortgage Loan shall not
provide for negative amortization; (ix) such Subsequent Mortgage Loan must have
a fixed Mortgage Rate of at least ________% or, if an adjustable loan, a Gross
Margin of at least ________%; (x) following the purchase of such Subsequent
Mortgage Loans by the Issuer, the Mortgage Loans included in the Trust Estate
must have a weighted average interest rate, a weighted average remaining term to
maturity and a weighted Loan-to Value Ratio as of each respective Subsequent
Cut-off Date which will not vary materially from those of the Initial Mortgage
Loans included initially in the Trust Estate; (xi) each Subsequent Mortgage Loan
that is underwritten to the Seller's underwriting standards for AA, A and A-
credit risks and has a Loan-to-Value Ratio greater than _____% must be covered
by a MI Policy acceptable to the Bond Insurer; and (xii) any additional criteria
in the Insurance Agreement. In addition, the Bond Administrator shall not agree
to any transfer of Subsequent Mortgage Loans without (i) a signed certification
from the Bond Insurer required pursuant to Section 2.02(b)(vi) hereof and (ii)
confirmation from the Rating Agencies required pursuant to Section 2.02(b)(i)
hereof. Notwithstanding the foregoing, in the sole discretion of the Bond
Insurer, Subsequent Mortgage Loans with characteristics varying from those set
forth above may be purchased by the Issuer and included in the Trust Estate;
provided, however, that the addition of such Subsequent Mortgage Loans will not
materially affect the aggregate characteristics of the entire Mortgage Loans.

          (d)  Within five Business Days after the end of the Funding Period,
the Seller shall deliver to the Rating Agencies, the Indenture Trustee, the Bond
Administrator and the Bond Insurer a copy of the updated Mortgage Loan Schedule
including the Subsequent Mortgage Loans in electronic format.

Section 2.03  Pre-Funding Account.
              -------------------

              (a)  No later than the Closing Date, the Bond Administrator will
establish and maintain, on behalf of the Indenture Trustee, pursuant to the
Indenture the Pre-Funding Account. On the Closing Date, the Issuer will deposit
in the Pre-Funding Account the Original Pre-Funded Amount from the net proceeds
of the sale of the Class A Bonds.

Section 2.04  Interest Coverage Account.
              -------------------------

              (a)  No later than the Closing Date, the Bond Administrator will
establish and maintain, on behalf of the Indenture Trustee, pursuant to the
Indenture the Interest Coverage Account. On the Closing Date, the Issuer will
deposit in the Interest Coverage Account the Interest Coverage Amount from the
net proceeds of the sale of the Class A Bonds.

                                       8
<PAGE>

                                  ARTICLE III

                       REPRESENTATIONS AND WARRANTIES;
                              REMEDIES FOR BREACH

          Section 3.01 Seller Representations and Warranties.
                       -------------------------------------

          The Seller hereby represents and warrants to the Company, the Issuer
and the Bond Insurer as of the date hereof, as of the Closing Date (or if
otherwise specified below, as of the date so specified) and as of each
Subsequent Transfer Date:

          (a)  As to the Seller:

               (i)   The Seller (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Virginia and (ii)
is qualified and in good standing as a foreign corporation to do business in
each jurisdiction where such qualification is necessary, except where the
failure so to qualify would not have a material adverse effect on the Seller's
ability to enter into this Purchase Agreement and each Seller's Subsequent
Transfer Instrument and to consummate the transactions contemplated hereby and
thereby;

               (ii)  The Seller has the power and authority to make, execute,
deliver and perform its obligations under this Purchase Agreement and each
Seller's Subsequent Transfer Instrument and all of the transactions contemplated
under this Purchase Agreement and each Seller's Subsequent Transfer Instrument,
and has taken all necessary corporate action to authorize the execution,
delivery and performance of this Purchase Agreement and each Seller's Subsequent
Transfer Instrument;

               (iii) The Seller is not required to obtain the consent of any
other Person or any consent, approval or authorization from, or registration or
declaration with, any governmental authority, bureau or agency in connection
with the execution, delivery, performance, validity or enforceability of this
Purchase Agreement or any Seller's Subsequent Transfer Instrument, except for
such consents, approvals or authorization, or registration or declaration, as
shall have been obtained or filed, as the case may be;

               (iv)  The execution and delivery of this Purchase Agreement and
each Seller's Subsequent Transfer Instrument and the performance of the
transactions contemplated hereby by the Seller will not violate any provision of
any existing law or regulation or any order or decree of any court applicable to
the Seller or any provision of the certificate of incorporation or bylaws of the
Seller, or constitute a material breach of any mortgage, indenture, contract or
other agreement to which the Seller is a party or by which the Seller may be
bound;

               (v)   No litigation or administrative proceeding of or before any
court, tribunal or governmental body is currently pending, or to the knowledge
of the Seller threatened, against the Seller or any of its properties or with
respect to this Purchase Agreement or any Seller's Subsequent Transfer
Instrument, the Bonds or the Certificates which in the opinion of the

                                       9
<PAGE>

Seller has a reasonable likelihood of resulting in a material adverse effect on
the transactions contemplated by this Purchase Agreement or any Seller's
Subsequent Transfer Instrument;

               (vi)   This Purchase Agreement and each Seller's Subsequent
Transfer Instrument constitute the legal, valid and binding obligations of the
Seller, enforceable against the Seller in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
affecting the enforcement of creditors' rights in general and except as such
enforceability may be limited by general principles of equity (whether
considered in a proceeding at law or in equity);

               (vii)  This Purchase Agreement constitutes a valid transfer and
assignment to the Company of all right, title and interest of the Seller in and
to the Cut-off Date Principal Balance of the Initial Mortgage Loans, all monies
due or to become due with respect thereto, and all proceeds of such Cut-off Date
Principal Balance of the Initial Mortgage Loans, and this Purchase Agreement and
the related Seller's Subsequent Transfer Instrument constitutes a valid transfer
and assignment to the Issuer of all right, title and interest of the Seller in
and to the Subsequent Cut-off Date Principal Balance of the Subsequent Mortgage
Loans, all monies due or to become due with respect thereto, and all proceeds of
such Subsequent Cut-off Date Principal Balance of the Subsequent Mortgage Loans;

               (viii) The Seller is not in default with respect to any order or
decree of any court or any order or regulation of any federal, state or
governmental agency, which default might have consequences that would materially
and adversely affect the condition (financial or other) or operations of the
Seller or its properties or might have consequences that would materially
adversely affect its performance hereunder; and

               (ix)   The Servicer or any Subservicer who will be servicing any
Mortgage Loan pursuant to the Servicing Agreement or a Subservicing Agreement is
qualified to do business in all jurisdictions in which its activities as
Servicer or Subservicer of the Mortgage Loans serviced by it require such
qualifications except where failure to be so qualified will not have a material
adverse effect on such servicing activities.

          (b)  As to each Initial Mortgage Loan as of the Closing Date, and with
respect to each Subsequent Mortgage Loan as of the Subsequent Transfer Date,
except as otherwise expressly stated:

               (i)  The information set forth on the Mortgage Loan Schedule with
                    respect to each Initial Mortgage Loan is true and correct in
                    all material respects as of the Closing Date, and with
                    respect to each Subsequent Mortgage Loan is true and correct
                    in all material respects as of the related Subsequent
                    Transfer Date, and the information regarding the Initial
                    Mortgage Loans and the Subsequent Mortgage Loans on the
                    computer diskette or tape delivered to the Bond Insurer
                    prior to the Closing Date or Subsequent Transfer Date, as
                    applicable, is true and accurate in all

                                       10
<PAGE>

                      material respects and describes the same Mortgage Loans as
                      the Mortgage Loans on the Mortgage Loan Schedule;

               (ii)   The Mortgage Loans are not being transferred with any
intent to hinder, delay or defraud any creditors;

               (iii)  No more than _____%, _____%, _____% and _____% of the
Group I, II, III and IV Initial Mortgage Loans, respectively (by Cut-off Date
Principal Balance) were secured by condominium units; no more than _____%,
_____%, _____% and _____% of the Group I, II, III and IV Initial Mortgage Loans,
respectively, (by Cut-off Date Principal Balance) were secured by attached
housing; and no more than _____%, _____%, _____% and _____% of the Group I, II,
III and IV Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) were secured by properties in planned unit developments;

               (iv)   As of the Cut-off Date, (a) the remaining term of each
Group I, II, III and IV Mortgage Loan is not more than 360 months and not less
than _____, _____, _____, and _____months, respectively;

               (v)    No more than _____%, _____%, _____% and _____% of the
Group I, II, III and IV Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) have been the subject of cash-out refinances;

               (vi)   No more than _____%, _____%, _____%, and _____% of the
Group I, II, III and IV Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) have been the subject of rate and term (no cash-out)
refinances;

               (vii)  No fewer than _____%, _____%, _____%, and _____% of the
Group I, II, III and IV Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) are purchase money loans;

               (viii) No more than _____%, _____%, _____%, and _____% of the
Group I, II, III and IV Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) are secured by Mortgaged Properties located in the State of
Florida, and no more than _____%, _____%, _____%, and _____% of the Group I, II,
III and IV Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) are located in any other state;

               (ix)   The original Principal Balances of the Initial Mortgage
Loans (by Cut-off Date Principal Balance) in Groups I, II, III and IV ranged
from $__________ to $__________, $__________ to $__________, $__________ to
$__________, and $__________ to $__________, respectively; the average
outstanding Principal Balance of the Initial Mortgage Loans in Groups I, II, III
and IV is approximately $__________, $__________, $__________ and $__________,
respectively;

               (x)    At least _____%, _____%, _____%, and _____% of the Group
I, II, III and IV Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) were secured by a first lien on a parcel of real property
improved by a detached single family residence; no more than _____%, _____%,
_____%, and _____% of the Group I, II, III and IV

                                       11
<PAGE>

Initial Mortgage Loans (by Cut-off Date Principal Balance) were secured by a
first lien on a parcel of real estate improved by a two-to four-unit single
family residence; and no more than _____%, _____%, _____%, and _____% of the
Group I, II, III and IV Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) were secured by a first lien on a parcel of real estate
improved by manufactured housing;

               (xi)    Each Group I, II, III and IV Initial Mortgage Loan will
have a first payment due date on or after __________, __________, __________ and
__________, respectively;

               (xii)   The Mortgage Rates borne by the Group I, II, III and IV
Initial Mortgage Loans as of the Cut-off Date range from _____% per annum to
_____% per annum, from _____% per annum to _____% per annum, from _____% per
annum to _____% per annum, and from _____% per annum to _____% per annum,
respectively, and the weighted average Mortgage Rate (by Cut-off Date Principal
Balance) of the Group I, II, III and IV Initial Mortgage Loans was _____%,
_____%, _____% and _____% per annum, respectively;

               (xiii)  Approximately _____%, _____%, _____%, and _____% of the
Group I, II, III and IV Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) have a Loan-to-Value Ratio in excess of _____%, _____%,
_____%, and _____%, respectively. No Group I, II, III and IV Initial Mortgage
Loan in the Mortgage Pool had a Loan-to-Value Ratio at origination in excess of
_____%, _____%, _____%, and _____%, respectively, and the weighted average Loan-
to-Value Ratio, (by Cut-off Date Principal Balance) of the Group I, II, III and
IV Initial Mortgage Loans was equal to or less than _____%, _____%, _____%, and
_____%, respectively.

               (xiv)   All of the Initial Mortgage Loans are secured by first
liens on the related Mortgaged Property;

               (xv)    [Reserved]

               (xvi)   There is no valid offset, right of rescission, defense,
claim or counterclaim of any obligor under any Mortgage Note or Mortgage,
including the obligation of the Mortgagor to pay the unpaid principal of or
interest on such Mortgage Note, and any applicable right of rescission has
expired, nor will the operation of any of the terms of such Mortgage Note or
Mortgage, or the exercise of any right thereunder, render either the Mortgage
Note or the Mortgage unenforceable, in whole or in part, or subject to any right
of rescission, set-off, recoupment, counterclaim or defense, including, without
limitation, the defense of usury, and no such right of rescission, set-off,
recoupment, counterclaim or defense has been asserted with respect thereto, and,
to the best of Seller's knowledge, no Mortgagor of the applicable Mortgage was a
debtor in any state or federal bankruptcy or insolvency proceeding;

               (xvii)  There are no mechanics' liens or claims for work, labor
or material affecting any Mortgaged Property which are or may be a lien prior
to, or equal with, the lien of such Mortgage, except those which are insured
against by the title insurance policy referred to in clause (xix) below;

                                       12
<PAGE>

               (xviii) As of the Cut-off Date in the case of an Initial Mortgage
Loan or as of the related Subsequent Cut-off Date in the case of a Subsequent
Mortgage Loan, each Mortgaged Property is free of material damage and is in good
repair and there is no proceeding pending or threatened for the total or partial
condemnation of any Mortgage Property;

               (xix)   Each Mortgage is a valid and enforceable first lien on
the Mortgaged Property securing the related Mortgage Note and each Mortgaged
Property is owned by the Mortgagor in fee simple (except with respect to common
areas in the case of condominiums, PUDs and de minimis PUDs) subject only to (1)
                                            -- -------
the lien of nondelinquent current real property taxes and assessments, (2)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage, such
exceptions appearing of record being acceptable to mortgage lending institutions
generally or specifically reflected in the appraisal made in connection with the
origination of the related Mortgage Loan or referred to in the lender's title
insurance policy delivered to the originator of the related Mortgage Loan and
(3) other matters to which like properties are commonly subject that do not
materially interfere with the benefits of the security intended to be provided
by such Mortgage. Immediately prior to the sale of such Mortgage Loan to the
Company in the case of an Initial Mortgage Loan and to the Issuer in the case of
a Subsequent Mortgage Loan pursuant to this Purchase Agreement, the Seller had
full right to sell and assign the same to the Company or the Issuer, as the case
may be. Immediately following the sale of such Mortgage Loan to the Company and
the Company's assignment and sale thereof to the Issuer in the case of an
Initial Mortgage Loan, the Issuer will have good title thereto subject to no
claims or liens other than the lien of the Indenture. Immediately following the
sale of such Mortgage Loan to the Company and the Company's assignment and sale
thereof to the Issuer in the case of a Subsequent Mortgage Loan, the Issuer will
have good title thereto subject to no claims or liens other than the lien of the
Indenture;

               (xx)    Each Mortgage Loan at origination complied in all
material respects with applicable state and federal laws, including, without
limitation, usury, equal credit opportunity, real estate settlement procedures,
the Truth In Lending Act of 1968, as amended, and disclosure laws and
consummation of the transactions contemplated hereby, including without
limitation, the receipt of interest by the owner of such Mortgage Loan or the
Holders of Bonds secured thereby, will not violate any such laws. Each Mortgage
Loan is being serviced in all material respects in accordance with applicable
state and federal laws, including, without limitation, the Truth In Lending Act
of 1968, as amended, and other consumer protection laws, real estate settlement
procedures, usury, equal credit opportunity and disclosure laws;

               (xxi)   Neither the Seller nor any prior holder of any Mortgage
has impaired, waived, altered or modified the Mortgage or Mortgage Notes in any
material respect (except that a Mortgage Loan may have been modified by a
written instrument which has been recorded, if necessary to protect the
interests of the owner of such Mortgage Loan or the Bonds, and which has been
delivered to the Indenture Trustee); satisfied, canceled or subordinated such
Mortgage in whole or in part; released the applicable Mortgaged Property in
whole or in part from the lien of such Mortgage; or executed any instrument of
release, cancellation or satisfaction with respect thereto;

                                       13
<PAGE>

               (xxii)  A lender's policy of title insurance (on an ALTA or CLTA
form) or binder, or other assurance of title customary in the relevant
jurisdiction insuring the first lien priority of the Mortgage Loan in an amount
at least equal to the original Principal Balance of each such Mortgage Loan or a
commitment binder or commitment to issue the same was effective on the date of
the origination of each Mortgage Loan, each such policy is valid and remains in
full force and effect, and each such policy was issued by a title insurer
qualified to do business in the jurisdiction where the Mortgaged Property is
located, which policy insures the Seller and successor owners of indebtedness
secured by the insured Mortgage as to the first or second priority lien of the
Mortgage as applicable. The Seller is, and such successor owners will be, the
sole insured under such lender's title insurance policy; no claims have been
made under such mortgage title insurance policy; no prior holder of the
applicable Mortgage, including the Seller, has done, by act or omission,
anything which would impair the coverage of such mortgage title insurance
policy; and each such policy, binder or assurance contains all applicable
endorsements;

               (xxiii) All of the improvements which were included for the
purpose of determining the Appraised Value of the Mortgaged Property lie wholly
within the boundaries and building restriction lines of such property and no
improvements on adjoining properties encroach upon the Mortgaged Property;

               (xxiv)  No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning law or regulation, subdivision
law or ordinance, except where the failure to comply would not have a material
adverse effect on the market value of the Mortgaged Property. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy and fire underwriting certificates, have been made or obtained from
the appropriate authorities and the Mortgaged Property is lawfully occupied
under applicable law except where the failure to comply would not have a
material adverse effect on the market value of the Mortgaged Property;

               (xxv)   Each Mortgage Note and the applicable Mortgage are
genuine, and each is the legal, valid and binding obligation of the maker
thereof, enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency, reorganization, moratorium, receivership and other
similar laws relating to creditors' rights generally or by equitable principles
(regardless of whether such enforcement is considered in a proceeding in equity
or at law). All parties to the Mortgage Note and the Mortgage had legal capacity
to execute the Mortgage Note and the Mortgage and each Mortgage Note and
Mortgage has been duly and properly executed by such parties;

               (xxvi)  The proceeds of the Mortgage Loans have been fully
disbursed, there is no requirement for future advances thereunder and any and
all requirements as to completion of any on-site or off-site improvements and as
to disbursement of any escrow funds therefor have been complied with. All costs,
fees and expenses incurred in making, closing or recording the Mortgage Loans
were paid and the Mortgagor is not entitled to any refund of amounts paid or due
under the Mortgage Note;

                                       14
<PAGE>

               (xxvii)  Each Mortgage contains customary and enforceable
provisions that render the rights and remedies of the holder thereof adequate
for the realization against the Mortgaged Property of the benefits of the
security, including (i) in the case of a Mortgage designated as a deed of trust,
by trustee's sale, and (ii) otherwise by judicial foreclosure or if applicable,
non-judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and
foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the
proper procedures, the holder of the Mortgage Loan will be able to deliver good
and merchantable title to the property, subject to any applicable rights of
redemption;

               (xxviii) With respect to each Mortgage constituting a deed of
trust, either a trustee, duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in such
Mortgage or if no duly qualified trustee has been properly designated and so
serves, the Mortgage contains satisfactory provisions for the appointment of
such trustee by the holder of the Mortgage at no cost or expense to such holder,
and no fees or expenses are or will become payable by the Bondholders or the
Bond Insurer to the trustee under the deed of trust, except in connection with a
trustee's sale after default by the Mortgagor;

               (xxix)   There exist no deficiencies with respect to escrow
deposits and payments, if such are required, for which customary arrangements
for repayment thereof cannot be made, and no escrow deficits or payments of
other charges or payments due the Seller have been capitalized under the
Mortgage or the applicable Mortgage Note;

               (xxx)    The Mortgage Note is not and has not been secured by any
collateral, pledged account or other security other than real estate securing
the Mortgagor's obligations and no Mortgage Loan is secured by more than one
Mortgaged Property;

               (xxxi)   As of the Closing Date in the case of an Initial
Mortgage Loan and as of the related Subsequent Transfer Date in the case of a
Subsequent Mortgage Loan, the improvements upon each Mortgaged Property are
covered by a valid and existing hazard insurance policy substantially acceptable
to FNMA and acceptable to the Seller which policy provides for fire extended
coverage and such other hazards as are customary in the area where the Mortgaged
Property is located representing coverage in an amount not less than the lesser
of (A) the maximum insurable value of the improvements securing such Mortgage
Loan and (B) the outstanding Principal Balance of the related Mortgage Loan; if
the improvement on the Mortgaged Property is a condominium unit, it is included
under the coverage afforded by a blanket policy for the condominium project. All
individual insurance policies contain a standard mortgagee clause naming the
Seller or the original holder of the Mortgage, and its successors in interest,
as mortgagee, and the Seller has received no notice that any premiums due and
payable thereon have not been paid; the Mortgage obligates the Mortgagor
thereunder to maintain all such insurance at the Mortgagor's cost and expense,
and upon the Mortgagor's failure to do so, authorizes the holder of the Mortgage
to obtain and maintain such insurance at the Mortgagor's cost and expense and to
seek reimbursement therefor from the Mortgagor. There has been no act or
omission which would impair the coverage of any such policy, the benefits of the
endorsement provided for herein, or the validity and binding effect of either;

                                       15
<PAGE>

               (xxxii)   If the Mortgaged Property is in an area identified in
the Federal Register by the Federal Emergency Management Agency as having
special flood hazards, a flood insurance policy in a form meeting the
requirements of the current guidelines of the Flood Insurance Administration is
in effect with respect to such Mortgaged Property with a generally acceptable
carrier in an amount representing coverage not less than the least of (A) the
outstanding Principal Balance of the Mortgage Loan, (B) the minimum amount
required to compensate for damage or loss on a replacement cost basis and (C)
the maximum amount of flood coverage that is available under federal law;

               (xxxiii)  Except for the Mortgage Loans referred to in clause
(xii) as being delinquent, there is no material monetary default, breach,
violation or event of acceleration existing under the Mortgage or the applicable
Mortgage Note; and no material event which, with the passage of time or with
notice and the expiration of any grace or cure period, would constitute a
material default, breach, violation or event of acceleration, and neither the
Seller, any of its affiliates nor any servicer or subservicer of any related
Mortgage Loan has waived any default, breach, violation or event of
acceleration; no foreclosure action is threatened or has been commenced with
respect to the Mortgage Loan;

               (xxxiv)   Each Mortgage Loan is being serviced by NovaStar
Mortgage, Inc.;

               (xxxv)    There is no obligation on the part of the Seller or any
other party to make any payments with respect to the related Mortgage Loan in
addition to the Monthly Payments required to be made by the applicable
Mortgagor;

               (xxxvi)   Any future advances made prior to the Cut-off Date in
the case of an Initial Mortgage Loan and as of the related Subsequent Transfer
Date in the case of a Subsequent Mortgage Loan, with respect to any Mortgage
Loan have been consolidated with the outstanding principal amount secured by
such Mortgage, and the secured principal amount, as consolidated, bears a single
interest rate and single repayment term reflected on the Mortgage Loan Schedule.
Except with respect to the Negative Amortization Loans, the consolidated
principal amount does not exceed the original principal amount of the Mortgage
Loan. The Mortgage Note with respect to any Mortgage Loan does not permit or
obligate the Servicer to make future advances to the Mortgagor at the option of
the Mortgagor;

               (xxxvii)  The Seller has caused or will cause to be performed any
and all acts required to preserve the rights and remedies of the Company and the
Issuer evidencing an interest in the Mortgage Loans in any insurance policies
applicable to the Mortgage Loans including, without limitation, any necessary
notifications of insurers, assignments of policies or interests therein, and
establishments of coinsured, joint loss payee and mortgagee rights in favor of
Indenture Trustee;

               (xxxviii) Except as set forth in clause (xlii), there are no
defaults by the Mortgagor in complying with the terms of any Mortgage, and all
taxes, governmental assessments, insurance premiums, water, sewer and municipal
charges which previously became due and owing have been paid, or, if required by
the terms of the Mortgage Loan, an escrow of funds has been established in an
amount sufficient to pay for every such item which remains

                                       16
<PAGE>

unpaid and which has been assessed, but is not yet due and payable. Except for
(A) payments in the nature of escrow payments and (B) interest accruing from the
date of the Mortgage Note or date of disbursement of the Mortgage proceeds to
the day which precedes by one month the Due Date of the first installment of
principal and interest, including, without limitation, taxes and insurance
payments, the Servicer has not advanced funds, or induced, solicited or
knowingly received any advance of funds by a party other than the Mortgagor,
directly or indirectly, for the payment of any amount required by the Mortgage;

               (xxxix)  At the time of origination, each Mortgaged Property was
the subject of an appraisal which conforms to the underwriting requirements of
the related originator; and the Mortgage File contains an appraisal of the
applicable Mortgaged Property;

               (xl)     None of the Mortgage Loans are graduated payment
Mortgage Loans or growth equity Mortgage Loans;

               (xli)    _____% or _____% of the Group I and II Mortgage Loans,
respectively, are Convertible Mortgage Loans; none of the Group III and IV
Mortgage Loans permit or require the conversion of the related Mortgage Rate to
a fixed rate;

               (xlii)   Except with respect to no more than _____% of the
Initial Mortgage Loans (by Cut-off Date Principal Balance), none of the payments
of principal of or interest on or in respect of any Initial Mortgage Loans shall
be 30 days or more but less than 60 days past due as of the Cut-off Date; except
with respect to no more than _____% of the Initial Mortgage Loans (by Cut-off
Date Principal Balance), none of the payments of principal or interest on or in
respect of any Initial Mortgage Loans shall be 60 days or more but less than 90
days past due as of the Cut-off Date; except with respect to no more than 0% of
the Initial Mortgage Loans (by Cut-off Date Principal Balance), none of the
payments of principal or interest on or in respect of any Initial Mortgage Loans
shall be 90 days or more but less than 120 days past due as of the Cut-off Date;
and no Initial Mortgage Loan was 120 days or more past due as of the Cut-off
Date; (b) except as set forth in clause (a) above, no Initial Mortgage Loan has
been contractually delinquent for more than one monthly installment period
during the twelve months preceding the Cut-off Date; (c) except as set forth in
clause (a) above, all payments required to be made by the Mortgagor under the
terms of the Mortgage Note have been made and credited; and (d) to the Seller's
knowledge, there was no delinquent recording, tax or assessment lien against the
property subject to any Mortgage, except where such lien was being contested in
good faith and a stay had been granted against levying on the property;

               (xliii)  Upon payment of the Purchase Price for the Mortgage
Loans by the Company or the Issuer, as applicable, pursuant to this Purchase
Agreement, the Seller has transferred to the Company in the case of an Initial
Mortgage Loan and to the Issuer in the case of a Subsequent Mortgage Loan, good
and marketable title to each Mortgage Note and Mortgage free and clear of any
and all liens (except as set forth in clause (xix) above), claims, encumbrances,
participation interests, equities, pledges, charges or security interests of any
nature and has or had full right and authority, subject to no participation of
or agreement with any other person, to sell and assign the same, and following
the sale of each Initial Mortgage Loan, the Company or the Issuer, as
applicable, will own such Mortgage Loan free and clear of any

                                       17
<PAGE>

encumbrance, equity interest, participation interest, lien, pledge, charge,
claim or security interest;

               (xliv)   The Seller acquired any right, title and interest in and
to the Mortgage Loans in good faith and without notice of any adverse claim;

               (xlv)    100% of the Group I and Group II Mortgage Loans are
Adjustable Rate Mortgage Loans; 0% of the Group III and Group IV Mortgage Loans
are Adjustable Rate Mortgage Loans; 0% of the Group I and Group II Mortgage
Loans are Fixed Rate Mortgage Loans, 100% of the Group III and Group IV Mortgage
Loans are Fixed Rate Mortgage Loans;

               (xlvi)   The Mortgage Note, the Mortgage, the related Assignment
of Mortgage and any other documents required to be delivered by the Seller have
been delivered to the Bond Administrator. The Bond Administrator is in
possession of a complete, true and accurate Mortgage File in accordance with
Section 2.01 hereof. Substantially all Mortgage Loans have monthly payments due
on the first day of each month and each Mortgage Loan had an original term to
maturity of no greater than 30 years;

               (xlvii)  Each Mortgage Loan contains a due-on-sale provision,
although each Mortgage Loan may be assumable if permitted by the Servicer under
certain circumstances;

               (xlviii) Each of the Mortgage and the Assignment of Mortgage is
in recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;

               (xlix)   The Mortgagor has not notified the Seller, and the
Seller has no knowledge of any relief requested or allowed to the Mortgagor
under the Soldiers' and Sailors' Civil Relief Act of 1940;

               (l)      To the best of the Seller's knowledge, there exists no
violation of any local, state, or federal environmental law, rule or regulation
in respect of the Mortgaged Property which violation has or could have a
material adverse effect on the market value of such Mortgaged Property. The
Seller has no knowledge of any pending action or proceeding directly involving
the related Mortgaged Property in which compliance with any environmental law,
rule or regulation is in issue; and, to the best of the Seller's knowledge,
nothing further remains to be done to satisfy in full all requirements of each
such law, rule or regulation constituting a prerequisite to the use and
employment of such Mortgaged Property;

               (li)     Each Mortgage Loan conforms, and all such Mortgage Loans
in the aggregate conform, to the description thereof set forth in the Prospectus
and Prospectus Supplement in all material respects;

               (lii)    Immediately prior to the transfer to the Company or the
Issuer, as applicable, the Seller had good and marketable title thereto, and the
Seller is the sole owner of beneficial title to and holder of the Mortgage Loan.
The Seller is conveying the same to the Company or the Issuer, as applicable,
free and clear of any and all liens, claims, encumbrances, participation
interests, equities, pledges, charges or security interests of any nature and
has full

                                       18
<PAGE>

right and authority to sell and assign the same pursuant to this Purchase
Agreement, except for liens which will be released simultaneously with such
conveyance;

               (liii)  For each Mortgage Loan, the related Mortgage File
contains a true, accurate and correct copy of each of the documents and
instruments required to be included therein;

               (liv)   The Servicer meets all applicable requirements under the
Servicing Agreement, is properly qualified to service each Mortgage Loan and has
been servicing each Mortgage Loan prior to the Cut-off Date or the related
Subsequent Cut-Off Date, as the case may be;

               (lv)    No instrument of release or waiver has been executed in
connection with the Mortgage Loans, and no Mortgagor has been released, in whole
or in part from its obligations in connection with a Mortgage Loan except in
connection with an assumption agreement which has been delivered to the
Indenture Trustee;

               (lvi)   On the basis of a representation by the Mortgagor at the
time of origination of the Mortgage Loans, at least _____%, _____%, _____%, and
_____% of the Group I, II, III and IV Initial Mortgage Loans, respectively, (by
Cut-off Date Principal Balance) will be secured by Mortgages on owner-occupied
primary residence properties;

               (lvii)   _____%, _____%, _____%, and _____% of the Group I, II,
III and IV Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) provide for a balloon payment and each Mortgage Note with respect to
each such Mortgage Loan requires monthly payments of principal based on 30 year
amortization schedules and have scheduled maturity dates of 15 years from the
due date of the first monthly payment;

               (lviii)  No Mortgage Loan was originated based on an appraisal of
the related Mortgaged Property made prior to completion of construction of the
improvements thereon;

               (lix)    None of the Mortgage Loans is a "buy down" mortgage
loan;

               (lx)     [reserved]

               (lxi)    No selection procedure reasonably believed by the Seller
to be adverse to the interests of the Bondholders or the Bond Insurer was
utilized in selecting the Mortgage Loans;

               (lxii)   The terms of the Mortgage Note related to each Group III
and IV Mortgage Loan provide that, following an initial period of six months,
one year, two years, three years or ten years following the month in which such
Mortgage Loan was originated and semiannually or annually thereafter (each such
date, an "Adjustment Date"), the Mortgage Rate on such Mortgage Loan will be
adjusted to equal the sum of (a) the related Index and (b) a fixed percentage
amount specified in the related Mortgage Note (each, a "Gross Margin"),
provided, however, that the Mortgage Rate generally will not increase or
decrease by the related Periodic

                                       19
<PAGE>

Rate Cap, and will not increase above a specified maximum Mortgage Rate over the
life of the Group III or IV Mortgage Loan (the "Maximum Mortgage Rate") or
decrease below a specified minimum Mortgage Rate over the life of the Group III
or IV Mortgage Loan (the "Minimum Mortgage Rate");

               (lxiii)  None of the Initial Mortgage Loans (by Cut-off Date
Principal Balance) are negative amortization loans, and none of the Subsequent
Mortgage Loans shall be negative amortization loans;

               (lxiv)   No material misrepresentation, fraud or similar
occurrence with respect to a Mortgage Loan has taken place on the part of the
Seller, its affiliates or employees or any other person involved in the
origination of the Mortgage Loan or in the application for any insurance,
including, but not limited to the MI Policy, in relation to such Mortgage Loan;

               (lxv)    Each Mortgage Loan was originated by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to Sections
203 and 211 of the Act, a savings and loan association, a savings bank, a
commercial bank, credit union, insurance company or similar institution which is
supervised and examined by a federal or state authority;

               (lxvi)   With respect to each Mortgage Loan secured by
manufactured housing, such manufactured housing is permanently affixed to a
foundation and constitutes real estate under applicable state law;

               (lxvii)  No Mortgage Loans are date of payment or simple interest
loans;

               (lxviii) The sale, transfer, assignment and conveyance of
Mortgage Loans by the Seller pursuant to this Purchase Agreement is not subject
to and will not result in any tax, fee or governmental charge payable by the
Company, the Issuer, the Bond Administrator or the Indenture Trustee to any
federal, state or local government ("Transfer Taxes") other than Transfer Taxes
which have or will be paid by the Seller as due; and

               (lxix)   Each Group of Mortgage Loans were underwritten pursuant
to the Seller's credit risk standards as follows:

                          Group I   Group II   Group III   Group IV
                    -----------------------------------------------
                    AA    _____%     _____%     _____%      _____%
                    -----------------------------------------------
                    A     _____%     _____%     _____%      _____%
                    -----------------------------------------------
                    A-    _____%     _____%     _____%      _____%
                    -----------------------------------------------
                    B     _____%     _____%     _____%      _____%
                    -----------------------------------------------
                    C     _____%     _____%     _____%      _____%
                    -----------------------------------------------
                    D     _____%     _____%     _____%      _____%
                    -----------------------------------------------

                                       20
<PAGE>

               (lxx)    Each Initial Mortgage Loan that is underwritten to the
Seller's AA, A and A- credit risks and has a Loan-to-Value Ratio greater than
_____% is covered by a MI Policy acceptable to the Bond Insurer;

               (lxxi)   Approximately _____% of the charted Initial Mortgage
Loans, which in the aggregate have an Initial Principal Balance of $__________
on the Cut-Off Date, are covered by a MI Policy issued by the MI Insurer;

               (lxxii)  Each of the Initial Mortgage Loans that is identified on
Schedule 1 hereto is covered by a MI Policy issued by the MI Insurer (and
identified by Group);

               (lxxiii) All requirements for the valid transfer of each MI
Policy, including any assignments or notices required in each MI Policy, have
been satisfied; and

               (lxxiv)  No more than _____%, _____%, _____% and _____% of the
Initial Mortgage Loans (by Cut-off Date Principal Balance) of the Group I, II,
III and IV Initial Mortgage Loans, respectively, are Convertible Mortgage Loans.

               (lxxv)   As of the Closing Date with respect to each Initial
Mortgage Loan that is subject to a MI Policy and as of each Subsequent Transfer
Date with respect to each Subsequent Mortgage Loan that is subject to a MI
Policy, the Seller is unaware of any existing circumstances which would cause
the MI Insurer to deny a claim with respect to such Mortgage Loan.

          Upon discovery by the Seller or upon notice from the Company, the Bond
Insurer, the Issuer, the Owner Trustee, the Indenture Trustee, or the Bond
Administrator, as applicable, of a breach of any representation or warranty in
subsection (a) of this Section which materially and adversely affects the
interests of the Bondholders or the Certificateholders or the Bond Insurer, as
applicable, the Seller shall, within 45 days of its discovery or its receipt of
notice of such breach, either (i) cure such breach in all material respects or
(ii) to the extent that such breach is with respect to a Mortgage Loan or a
Related Document, either (A) repurchase such Mortgage Loan from the Issuer at
the Repurchase Price, or (B) substitute one or more Eligible Substitute Mortgage
Loans for such Mortgage Loan, in each case in the manner and subject to the
conditions and limitations set forth below.

          Upon discovery by the Seller or upon notice from the Company, the Bond
Insurer, the Issuer, the Owner Trustee, the Indenture Trustee, or the Bond
Administrator, as applicable, of a breach of any representation or warranty in
this subsection (b) with respect to any Mortgage Loan or upon the occurrence of
a Repurchase Event, which materially and adversely affects the value of the
related Mortgage Loan or the interests of any Bondholders, Certificateholders or
the Bond Insurer, as applicable, or of the Company or the Issuer in such
Mortgage Loan (notice of which shall be given to the Company and the Issuer by
the Seller, if it discovers the same) the Seller shall, within 90 days after the
earlier of its discovery or receipt of notice thereof, either cure such breach
or Repurchase Event in all material respects or either (i) repurchase such
Mortgage Loan from the Issuer at the Repurchase Price, or (ii) substitute one or
more Eligible Substitute Mortgage Loans for such Mortgage Loan, in each case in
the manner and subject to the

                                       21
<PAGE>

conditions set forth below. The Repurchase Price for any such Mortgage Loan
repurchased by the Seller shall be deposited or caused to be deposited by the
Servicer in the Collection Account maintained by it pursuant to Section 3.06 of
the Servicing Agreement.

          In the event that the Seller elects to substitute an Eligible
Substitute Mortgage Loan or Loans for a Deleted Mortgage Loan pursuant to this
Section 3.01, the Seller shall deliver to the Bond Administrator on behalf of
the Issuer, with respect to such Eligible Substitute Mortgage Loan or Loans, the
original Mortgage Note and all other documents and agreements as are required by
Section 2.01 hereof, with the Mortgage Note endorsed as required by such Section
2.01 hereof. No substitution will be made in any calendar month after the
Determination Date for such month. Monthly Payments due with respect to Eligible
Substitute Mortgage Loans in the month of substitution shall not be part of the
Trust Estate and will be retained by the Servicer and remitted by the Servicer
to the Seller on the next succeeding Payment Date. For the month of
substitution, distributions to the Payment Account pursuant to the Servicing
Agreement will include the Monthly Payment due on a Deleted Mortgage Loan for
such month and thereafter the Seller shall be entitled to retain all amounts
received in respect of such Deleted Mortgage Loan. The Servicer shall amend or
cause to be amended the Mortgage Loan Schedule to reflect the removal of such
Deleted Mortgage Loan and the substitution of the Eligible Substitute Mortgage
Loan or Loans and the Servicer shall deliver the amended Mortgage Loan Schedule
to the Bond Administrator and the Indenture Trustee. Upon such substitution, the
Eligible Substitute Mortgage Loan or Loans shall be subject to the terms of this
Purchase Agreement, the Indenture and the Servicing Agreement in all respects,
the Seller shall be deemed to have made the representations and warranties with
respect to the Eligible Substitute Mortgage Loan contained herein set forth in
this Section 3.01(b), to the extent set forth in the definition of "Eligible
Substitute Mortgage Loan", as of the date of substitution, and the Seller shall
be obligated to repurchase or substitute for any Eligible Substitute Mortgage
Loan as to which a Repurchase Event has occurred as provided herein. In
connection with the substitution of one or more Eligible Substitute Mortgage
Loans for one or more Deleted Mortgage Loans, the Servicer will determine the
amount (such amount, a "Substitution Adjustment Amount"), if any, by which the
aggregate principal balance of all such Eligible Substitute Mortgage Loans as of
the date of substitution is less than the aggregate principal balance of all
such Deleted Mortgage Loans (after application of the principal portion of the
Monthly Payments due in the month of substitution that are to be distributed to
the Payment Account in the month of substitution). The Seller shall pay the
amount of such shortfall to the Servicer for deposit into the Collection Account
on the day of substitution, without any reimbursement therefor.

          Upon receipt by the Issuer of written notification, signed by a
Servicing Officer, of the deposit of such Repurchase Price or of such
substitution of an Eligible Substitute Mortgage Loan and deposit of any
applicable Substitution Adjustment Amount as provided above, the Bond
Administrator shall, on behalf of the Indenture Trustee, the Issuer and the Bond
Insurer, cause to be released to the Seller the related Mortgage File for the
Mortgage Loan being repurchased or substituted for and the Issuer shall execute
and deliver such instruments of transfer or assignment prepared by the Servicer,
in each case without recourse, as shall be necessary to vest in the Seller or
its designee such Mortgage Loan released pursuant hereto and thereafter such
Mortgage Loan shall not be an asset of the Issuer.

                                       22
<PAGE>

              It is understood and agreed that the obligation of the Seller to
cure any breach with respect to or to repurchase or substitute for, any Mortgage
Loan as to which such a breach has occurred and is continuing shall, except to
the extent provided in Section 5.01 of this Purchase Agreement, constitute the
sole remedy respecting such breach available to the Company, the Issuer, the
Certificateholders (or the Owner Trustee on behalf of the Certificateholders)
and the Bondholders (or the Bond Administrator on behalf of the Indenture
Trustee for the benefit of Bondholders) against the Seller.

              It is understood and agreed that the representations and
warranties set forth in this Section 3.01 shall survive delivery of the
respective Mortgage Files to the Bond Administrator.

Section 3.02  Company Representations and Warranties.
              --------------------------------------

              The Company hereby represents and warrants to the Seller and the
Bond Insurer as of the date hereof and as of the Closing Date that:

              (a)  The Company is duly organized and validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority to own its properties and to conduct its business as such
properties are currently owned and such business is presently conducted.

              (b)  The Company is duly qualified to do business as a foreign
corporation in good standing and has obtained all necessary licenses and
approvals in all jurisdictions in which the ownership or lease of its property
or the conduct of its business shall require such qualifications and in which
the failure to so qualify would have a material adverse effect on the business,
properties, assets or condition (financial or other) of the Company and the
ability of the Company to perform under this Purchase Agreement.

              (c)  The Company has the power and authority to execute and
deliver this Purchase Agreement and to carry out its terms; the Company has full
power and authority to purchase the property to be purchased from the Seller and
the Company has duly authorized such purchase by all necessary corporate action;
and the execution, delivery and performance of this Purchase Agreement have been
duly authorized by the Company by all necessary corporate action.

              (d)  The consummation of the transactions contemplated by this
Purchase Agreement and the fulfillment of the terms hereof do not conflict with,
result in any breach of any of the terms and provisions of, or constitute (with
or without notice or lapse of time) a default under, the articles of
incorporation or bylaws of the Company, or any indenture, agreement or other
instrument to which the Company is a party or by which it is bound; nor result
in the creation or imposition of any Lien upon any of its properties pursuant to
the terms of any such indenture, agreement or other instrument (other than
pursuant to the Basic Documents); nor violate any law or, to the best of the
Company's knowledge, any order, rule or regulation applicable to the Company of
any court or of any federal or state regulatory body, administrative agency or
other governmental instrumentality having jurisdiction over the Company or its
properties.

                                       23
<PAGE>

              (e)  The Company (A) is a solvent entity and is paying its debts
as they become due and (B) after giving effect to the transfer of the Mortgage
Loans, will be a solvent entity and will have sufficient resources to pay its
debts as they become due.

                                  ARTICLE IV

                              SELLER'S COVENANTS

Section 4.01  Covenants of the Seller.
              -----------------------

              The Seller hereby covenants as of the date hereof and as of the
Closing Date that, except for the transfer hereunder, on and after the Closing
Date, the Seller will not sell, pledge, assign or transfer to any other Person,
or grant, create, incur or assume any Lien on, any Mortgage Loan, whether now
existing or hereafter created, or any interest therein; the Seller will notify
the Issuer, on its own behalf and as assignee of the Company, the Bond
Administrator, the Indenture Trustee and the Bond Insurer of the existence of
any such Lien on any Mortgage Loan immediately upon discovery thereof; and the
Seller will defend the right, title and interest of the Issuer, on its own
behalf and as assignee of the Company, in, to and under the Mortgage Loans,
whether now existing or hereafter created, against all claims of third parties
claiming through or under the Seller.

              In the event that the Bond Administrator or the Indenture Trustee
receives actual notice of any Transfer Taxes arising out of the transfer,
assignment and conveyance of the Mortgage Loans, on written demand by the Bond
Administrator, or upon the Seller's otherwise being given notice thereof by the
Bond Administrator, the Seller shall pay any and all such Transfer Taxes (it
being understood that the Holders of the Bonds, the Bond Administrator, the
Indenture Trustee and the Bond Insurer shall have no obligation to pay such
Transfer Taxes).

Section 4.02  Payment of Expenses.
              -------------------

              (a)  The Seller will pay on the Closing Date all expenses incident
to the performance of its obligations under this Purchase Agreement and the
Underwriting Agreement, including (i) the preparation, printing and any filing
of the preliminary prospectus, Prospectus Supplement and Prospectus (including
any schedules or exhibits and any document incorporated therein by reference)
originally filed and of each amendment or supplement thereto, (ii) the
preparation, printing and delivery to the Underwriter of this Purchase Agreement
and the Underwriting Agreement, the Indenture and such other documents as may be
required in connection with the offering, purchase, sale and delivery of the
Bonds, (iii) the preparation, issuance and delivery of the certificates for the
Class A Bonds to the Underwriter, including any charges of DTC, CEDEL, S.A. and
the Euroclear System in connection therewith; (iv) the qualification of the
Class A Bonds under securities laws in accordance with the provisions of Section
3(f) of the Underwriting Agreement, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriter in connection therewith
and in connection with the preparation of the Blue Sky Survey and any supplement
thereto for delivery to potential investors, (v) in addition to the initial
printing and filing costs under (i) above, the printing and

                                       24
<PAGE>

delivery to the Underwriter of copies of each preliminary prospectus and of the
Prospectus and any amendments or supplements thereto for delivery to potential
investors, (vi) the fees and expenses of the Indenture Trustee, the Bond
Administrator and Owner Trustee, including the fees and disbursements of counsel
for the Indenture Trustee, the Bond Administrator and Owner Trustee in
connection with the Indenture, the Trust Agreement and the Bonds and (vii) any
fees payable in connection with the rating of the Bonds.

          (b)  If the Underwriting Agreement is terminated by the Underwriter in
accordance with the provisions of Section 5 or Section 9(a)(i) thereof, the
Seller shall reimburse the Underwriter for all of their out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Underwriter.

                                   ARTICLE V

                 CONDITIONS TO INITIAL MORTGAGE LOAN PURCHASE

Section 5.01  Conditions of Company's Obligations.
              -----------------------------------

              The Company's obligations to purchase the Initial Mortgage Loans
which each accepts for purchase hereunder shall be subject to each of the
following conditions:

                    (i)   the Mortgage File for each Initial Mortgage Loan shall
have been delivered in accordance with this Purchase Agreement and the Trust
Agreement;

                    (ii)  the representations and warranties set forth in
Section 3.01(b) hereof with respect to each Initial Mortgage Loan shall be true
as of the Closing Date;

                    (iii) The Underwriter or its affiliates shall have had an
opportunity to perform a due diligence review of each Mortgage Loan; and

                    (iv)  The Seller shall have provided to the Underwriter or
its affiliates such other documents which are then required to have been
delivered under this Purchase Agreement or which are reasonably requested by the
Underwriter or its affiliates, which other documents may include UCC financing
statements, a favorable opinion or opinions of counsel with respect to matters
which are reasonably requested by the Underwriter, and/or an Officers'
Certificate.

                                  ARTICLE VI

                         INDEMNIFICATION BY THE SELLER

                      WITH RESPECT TO THE MORTGAGE LOANS

Section 6.01  Indemnification With Respect to the Mortgage Loans.
              --------------------------------------------------

              The Seller shall indemnify and hold harmless the Company from and
against any loss, liability or expense arising from the breach by the Seller of
its representations and

                                       25
<PAGE>

warranties in Section 3.01 of this Purchase Agreement which materially and
adversely affects the value of any Mortgage Loan or the Company's assignees'
interest in any Mortgage Loan or from the failure by the Seller to perform its
obligations under this Purchase Agreement in any material respect.

Section 6.02  Limitation on Liability of the Seller.
              -------------------------------------

              None of the directors, officers, employees or agents of the Seller
shall be under any liability to the Company, it being expressly understood that
all such liability is expressly waived and released as a condition of, and as
consideration for, the execution of this Purchase Agreement. Except as and to
the extent expressly provided in the Basic Documents, the Seller shall not be
under any liability to the Issuer, the Owner Trustee, the Bond Administrator,
the Indenture Trustee, the Bondholders or the Certificateholders. The Seller and
any director, officer, employee or agent of the Seller may rely in good faith on
any document of any kind prima facie properly executed and submitted by any
Person respecting any matters arising hereunder.

                                  ARTICLE VII

                                  TERMINATION

Section 7.01  Termination.
              -----------

              (a)  Except as provided in Section 7.01(b) hereof, the respective
obligations and responsibilities of the Seller, the Company, the Issuer, the
Bond Administrator and the Indenture Trustee created hereby shall terminate,
except for the Seller's indemnity obligations as provided herein, upon the
termination of the Issuer pursuant to the terms of the Trust Agreement.

              (b)  The Company may terminate this Purchase Agreement, by notice
to the Seller, at any time at or prior to the Closing Date and prior to the
issuance of the Bond Insurance Policy:

                   (i)  if the Underwriting Agreement is terminated by the
Underwriter pursuant to the terms of the Underwriting Agreement or if there has
been, since the time of execution of this Purchase Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the financial condition, earnings, business affairs
or business prospects of the Seller, whether or not arising in the ordinary
course of business, or

                   (ii) if there has occurred any material adverse change in the
financial markets in the United States, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Underwriter, impracticable to market the Class A Bonds or
to enforce contracts for the sale of the Class A Bonds, or

                                       26
<PAGE>

                    (iii) if trading in any securities of the Seller has been
suspended or limited by the Commission or the New York Stock Exchange, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the NASDAQ National Market System has been suspended or limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the National Association of Securities Dealers, Inc. or
any other governmental authority,

                    (iv)  if a banking moratorium has been declared by either
Federal or ________ authorities,

                    (v)   either (A) a change in control of the Seller shall
have occurred other than in connection with and as a result of the issuance and
sale by the Seller or registered, publicly offered common stock; or (B) the
Underwriter determines in its sole discretion that any material adverse change
has occurred in the management of the Seller,

                    (vi)  there is (A) a material breach by the Seller of any
representation and warranty contained in this Purchase Agreement or the
Underwriting Agreement other than a representation or warranty relating to
particular Mortgage Loans, and the Underwriter has reason to believe in good
faith either that such breach is not curable within two (2) days or that such
breach may not have been cured in all material respects at the expiration of two
(2) days following discovery thereof by the Seller or (B) a failure by the
                                                   --
Seller to make any payment payable by it under this Purchase Agreement or (C)
                                                                       --
any other failure by the Seller to observe and perform in any material respect
its material covenants, agreements and obligations with the Company, including
without limitation those contained in this Purchase Agreement, and Company has
reason to believe in good faith that such failure may not have been cured in all
material respects at the expiration of two (2) days following discovery thereof
by the Seller, or

                    (vii) the Seller fails to provide written notification to
the Underwriter of any change in its loan origination, acquisition or appraisal
guidelines or practices, or the Seller, without the prior consent of the
Underwriter (which shall not be unreasonably withheld), amends in any material
respect its loan origination, acquisition or appraisal guidelines or practices.

          If this Purchase Agreement is terminated pursuant to this Section
7.01(b), such termination shall be without liability of any party to any other
party except as provided in Section 4.02 hereof.

                                 ARTICLE VIII

                           MISCELLANEOUS PROVISIONS

Section 8.01  Amendment.
              ---------

              This Purchase Agreement may be amended from time to time by the
Seller and the Company by written agreement signed by the Seller and the
Company, with the prior written consent of the Bond Insurer (which consent shall
not be unreasonably withheld).

                                       27
<PAGE>

Section 8.02  Governing Law.
              -------------

              This Purchase Agreement shall be governed by and construed in
accordance with the laws of the State of ________ and the obligations, rights
and remedies of the parties hereunder shall be determined in accordance with
such laws.

Section 8.03  Notices.
              -------

              All demands, notices and communications hereunder shall be in
writing and shall be deemed to have been duly given if personally delivered at
or mailed by registered mail, postage prepaid, addressed as follows:

                    (i)   if to the Seller:

                          NovaStar Mortgage, Inc.
                          1901 West 47/th/ Place
                          Suite 105
                          Westwood, Kansas 66205
                          Attention: Scott F. Hartman

              or, such other address as may hereafter be furnished to the
Company in writing by the Seller.

                    (ii)  if to the Company:

                          NovaStar Mortgage Funding Corporation
                          1901 W. 47/th/ Place
                          Suite 105
                          Westwood, Kansas 66205
                          Attention: Kelly Meinders, Vice President

              or such other address as may hereafter be furnished to the Seller
in writing by the Company.

                    (iii) if to the Issuer:

                          NovaStar Mortgage Funding Trust, Series ________
                          c/o NovaStar Mortgage, Inc.
                          1901 West 47/th/ Place
                          Suite 105
                          Westwood, Kansas 66205
                          Attention: Kelly Meinders, Vice President

              or such other address as may hereafter be furnished to the Seller
in writing by the Issuer.

                                       28
<PAGE>

                    (iv)  if to the Bond Administrator:

                          _________________________________
                          _________________________________
                          _________________________________
                          Attention: ______________________

              or such other address as may hereafter be furnished to the Seller
in writing by the Bond Administrator.

                    (v)   if to the Indenture Trustee

                          _________________________________
                          _________________________________
                          _________________________________
                          Attention: ______________________

              or such other address as may hereafter be furnished to the Seller
in writing by the Indenture Trustee.

     (vi) if to the Bond Insurer:

                          _________________________________
                          _________________________________
                          _________________________________

or such other address as may hereafter be furnished to the Seller in writing by
the Bond Insurer.

Section 8.04  Severability of Provisions.
              --------------------------

              If any one or more of the covenants, agreements, provisions or
terms of this Purchase Agreement shall be held invalid for any reason
whatsoever, then such covenants, agreements, provisions or terms shall be deemed
severable from the remaining covenants, agreements, provisions or terms of this
Purchase Agreement and shall in no way affect the validity or enforceability of
the other provisions of this Purchase Agreement.

Section 8.05  Relationship of Parties.
              -----------------------

              Nothing herein contained shall be deemed or construed to create a
partnership or joint venture between the parties hereto, and the services of the
Seller shall be rendered as an independent contractor and not as agent for the
Company.

Section 8.06  Counterparts.
              ------------

              This Purchase Agreement may be executed in two or more
counterparts and by the different parties hereto on separate counterparts, each
of which, when so executed, shall be

                                       29
<PAGE>

deemed to be an original and such counterparts together shall constitute one and
the same agreement.

Section 8.07  Further Agreements.
              ------------------

              The Company and the Seller each agree to execute and deliver to
the other such additional documents, instruments or agreements as may be
necessary or appropriate to effectuate the purposes of this Purchase Agreement.
Each of the Company and the Seller agrees to use its best reasonable efforts to
take all actions necessary to be taken by it to cause the Class A Bonds to be
issued and rated in the highest rating category by each of the Rating Agencies,
and each party will cooperate with the other in connection therewith.

Section 8.08  Intention of the Parties.
              ------------------------

              It is the intention of the parties that (i) the Company is
purchasing on the Closing Date, and the Seller is selling on the Closing Date,
the Initial Mortgage Loans, rather than the Company providing to the Seller a
loan secured by the Initial Mortgage Loans on the Closing Date, (ii) the Issuer
is purchasing on the Closing Date, and the Company is selling on the Closing
Date, the Initial Mortgage Loans, rather than the Issuer providing to the
Company a loan secured by the Initial Mortgage Loans, (iii) the Company will be
purchasing on each Subsequent Transfer Date, and the Seller will be selling on
each Subsequent Transfer Date, the related Subsequent Mortgage Loans, rather
than the Company providing to the Seller a loan secured by the related
Subsequent Mortgage Loans on each Subsequent Transfer Date, and (iv) the Issuer
will be purchasing on each Subsequent Transfer Date, and the Company will be
selling on each Subsequent Transfer Date, the related Subsequent Mortgage Loans,
rather than the Issuer providing to the Company a loan secured by the related
Subsequent Mortgage Loans on each Subsequent Transfer Date. Accordingly, the
parties hereto each intend to treat these transactions as (i) a sale by the
Seller, and a purchase by the Company, of the Initial Mortgage Loans on the
Closing Date, (ii) a sale by the Company, and a purchase by the Issuer, of the
Initial Mortgage Loans on the Closing Date, (iii) a sale by the Seller, and a
purchase by the Company, of the related Subsequent Mortgage Loans on each
Subsequent Transfer Date, and (iv) a sale by the Company, and a purchase by the
Issuer, of the related Subsequent Mortgage Loans on each Subsequent Transfer
Date.

Section 8.09  Successors and Assigns; Assignment of Purchase Agreement.
              --------------------------------------------------------

              This Purchase Agreement shall bind and inure to the benefit of and
be enforceable by the Seller, the Company, the Issuer, the Bond Administrator,
the Indenture Trustee and their respective successors and assigns and the Bond
Insurer. The obligations of the Seller under this Purchase Agreement cannot be
assigned or delegated to a third party without the consent of the Company and
the Bond Insurer, which consent shall be at the Company's and the Bond Insurer's
sole discretion. The parties hereto acknowledge that (i) the Company is
acquiring the Initial Mortgage Loans for the purpose of selling them to the
Issuer, who will in turn pledge the Initial Mortgage Loans to the Indenture
Trustee for the benefit of the Bondholders and the Bond Insurer and (ii) the
Company is acquiring the Subsequent Mortgage Loans for the purpose of selling
them to the Issuer, who will in turn pledge the Subsequent Mortgage Loans to the
Indenture

                                       30
<PAGE>

Trustee for the benefit of the Bondholders and the Bond Insurer. As an
inducement to the Company and the Issuer to purchase the Mortgage Loans, the
Seller acknowledges and consents to (i) the assignment by the Company to the
Issuer of all of Company's rights or remedies against the Seller pursuant to
this Purchase Agreement and to the enforcement or exercise of any rights against
the Seller pursuant to this Purchase Agreement by the Company, the Issuer and
the Indenture Trustee, and (iii) the assignment by the Issuer to the Indenture
Trustee of all the Issuer's rights and remedies against the Seller and to the
enforcement or exercise of any rights against the Seller pursuant to this
Purchase Agreement by the Company, the Issuer and the Indenture Trustee. Such
enforcement of a right or remedy by the Company, the Issuer or the Indenture
Trustee, as applicable, shall have the same force and effect as if the right or
remedy had been enforced or exercised by the Company directly.

Section 8.10  Survival.
              --------

              The representations and warranties made herein by the Seller and
the provisions of Article V hereof shall survive the purchase of the Mortgage
Loans hereunder.

Section 8.11  Third Party Beneficiary.
              -----------------------

              The Bond Insurer shall be a third party beneficiary hereof and
shall be entitled to enforce the provisions of this Purchase Agreement as if a
party hereto.

Section 8.12  Limitation of Liability.
              -----------------------

              Notwithstanding any other provision herein or elsewhere, this
Purchase Agreement has been executed and delivered by ______________________,
not in its individual capacity, but solely in its capacity as Owner Trustee of
the Issuer. In no event shall the Owner Trustee have any liability in respect of
the representations, warranties, or obligations of the Issuer hereunder as to
all of which recourse shall be had solely to the assets of the Trust, and for
all purposes of this Purchase Agreement, the Owner Trustee shall be entitled to
the benefits of the Trust Agreement.

                                       31
<PAGE>

          IN WITNESS WHEREOF, the Seller, the Company, the Issuer, the Bond
Administrator and the Indenture Trustee have caused their names to be signed to
this Mortgage Loan Purchase Agreement by their respective officers thereunto
duly authorized as of the day and year first above written.

                              NOVASTAR MORTGAGE, INC.,
                              as Seller

                              By:  ____________________________________________
                                   Name:
                                   Title:

                              NOVASTAR MORTGAGE FUNDING CORPORATION,
                              as Company

                              By:  ____________________________________________
                                   Name:
                                   Title:

                              NOVASTAR MORTGAGE FUNDING TRUST,
                              SERIES _______, as Issuer

                              By:  ____________________________________________,
                                   not in its individual capacity but solely in
                              its capacity as Owner Trustee

                              By:  ____________________________________________,
                                   Name:
                                   Title:

                              _________________________________________________,
                              as Bond Administrator

                              By:  ____________________________________________
                                   Name:
                                   Title:

                              _________________________________________________,
                              as Indenture Trustee

                              By:  ____________________________________________
                                   Name:
                                   Title: