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Sale and Purchase Agreement - NovaStar Financial Inc. and NovaStar Mortgage Inc.

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                          SALE AND PURCHASE AGREEMENT

THIS Sale and Purchase Agreement (the "Agreement"), is made and entered into as
of _____________, 1997 by and between NovaStar Financial, Inc., ("Purchaser")
and NovaStar Mortgage, Inc. ("Seller").

                                  WITNESSETH

WHEREAS, Seller is engaged in the business of originating and selling mortgage
loans secured by real property; and

WHEREAS, Seller may desire to sell and Purchaser may desire to purchase from
Seller from time to time certain of those mortgage loans; and

WHEREAS, the parties intend hereby to set forth the terms and conditions upon
which the transactions will be effected.

                                   AGREEMENT

NOW, THEREFORE, in consideration of the promises and the mutual agreements
contained herein, the Purchaser and Seller agree as follows:

SECTION 1. Definitions. Whenever used herein, the following words and phrases,
           -----------
unless the context otherwise requires, shall have the following meanings:

Acquisition Cost: Amount paid by Seller to acquire mortgage loans from its
customers through its wholesale production operation, either on a flow or bulk
basis.

Agreement: This Purchase and Sale Agreement and all amendments hereof and
supplements hereto.

Assignment of Security Instrument: Assignment of all Seller's rights, title and
interest in and to a Security Instrument for the benefit of Purchaser, in a form
acceptable to Purchaser, to be executed by Seller in connection with each
Mortgage Loan purchased hereunder, as applicable.

Custodian: First Union National Bank, or its successor in interest or assigns,
or any successor to the Custodian.

Document Delivery Procedures: Procedures established by Purchaser for the
delivery of Loan Documents evidencing Loans to be purchased hereunder, attached
hereto as Exhibit "B", as may be amended from time to time by Purchaser in its
sole discretion.

Mortgage Loans: Each Mortgage Loan identified in the Schedule of Loans Delivered
that, from time to time, are subject to this Agreement.

Mortgage Loan Documents: For any Mortgage Loan, at least the documents listed on
Exhibit "B" hereto, as well as any other documents in Seller's possession
relating to the Mortgage Loan.

Mortgaged Premises: The fee simple interest in real property for each Mortgage
Loan purchased which shall consist only of real property improved by one-to-four
family residences, covered by a Security Instrument and securing an Obligor's
indebtedness under the related Note.

Note: Instrument evidencing the indebtedness of the Obligor under a Mortgage
Loan.

                                                                               1
<PAGE>
 
Obligor: The borrower or borrowers under a Note, any other person or entity who
owes payments under a Note, or a subsequent owner of Mortgaged Premises who has
assumed the respective Security Instrument.

Purchase Date: The funding date for the purchase of Mortgage Loans hereunder as
agreed to by the parties in writing on the Schedule of Loans Delivered.

Schedule of Loans Delivered: A listing of Mortgage Loans to be sold to
Purchaser, that at a minimum includes the loan number, borrower name, and loan
amount, and such other pertinent information that Purchaser deems reasonably
necessary in the circumstances, and that is also readily available to Seller.

Security Instrument: All deeds of trust, deeds to secure debt, trust deeds or
mortgages, as applicable securing repayment of the indebtedness evidenced by a
Note executed by an Obligor for a Mortgage Loan purchased hereunder, as
applicable.

Servicing Transfer Date: The date for the transfer of servicing of Mortgage
Loans from Seller to Purchaser as agreed to by the parties in writing on the
Schedule of Loans Delivered. Unless otherwise agreed to in writing, the
Servicing Transfer Date will be the Purchase Date.

SECTION 2.    Agreement to Sell and Purchase.
              ------------------------------

(a) Pursuant to the terms of this Agreement, Seller hereby agrees to sell,
    transfer, assign, set over and convey to the Purchaser, subject to the terms
    of this Agreement, all rights, title and interest of the Seller in and to
    the Mortgage Loans and the Purchaser hereby agrees to purchase the Mortgage
    Loans listed on the Schedule of Mortgage Loans Delivered.

(b) The Purchase Price paid by Purchaser to Seller for Mortgage Loans shall be
    as follows: 
    The Acquisition Cost for the Mortgage Loans plus a percentage of the unpaid
    principal balance of the Mortgage Loans delivered to the Purchaser under
    this Agreement. Such percentage will be agreed to by an officer of both
    Seller and Purchaser and may change based on the nature of Mortgage Loans
    being purchased. The Purchase Price will be presented to the Board of
    Directors of both Seller and Purchaser at their regularly scheduled meetings
    for review and approval. Acquisition Cost for Mortgage Loans will be
    determined by Seller and communicated at least weekly to Purchaser in
    writing via its wholesale rate sheet. An officer of the Purchaser must
    approve any variations to the Acquisition Cost as published in writing.

    Purchaser hereby agrees to purchase Mortgage Loans, at the agreed upon
    Purchase Price, on the date the Seller commits to purchase the loan from its
    customer. Purchaser also agrees to pay the Purchase Price in full at the
    applicable Purchase Date for such Mortgage Loan, or reimburse the Seller for
    interest cost incurred related to such Mortgage Loans.

(c) Unless otherwise agreed to by the parties hereto, the sale of Mortgage Loans
    hereof shall be made on a "servicing released" basis and shall constitute a
    transfer by Seller to Purchaser of all rights of every kind with respect to
    the servicing of each Mortgage Loan. Unless otherwise agreed to by both
    parties hereto, this transfer of servicing rights to Purchaser will be
    effective as of the Servicing Transfer Date.

(d) Unless otherwise agreed to by the parties hereto, the amount of Mortgage
    Loans to be acquired by Purchaser from Seller is limited to $1 billion
    annually.

SECTION 2.1.  Assignment of Servicing.  Seller hereby assigns and releases all
              -----------------------
servicing rights and responsibilities including without limitation, all rights
to receive servicing fees and other servicing-related income and benefits, with
respect to each Mortgage Loan purchased under this Agreement to and for the
benefit of Purchaser, as of the Servicing Transfer Date.

SECTION 2.2.  Interim Servicing.  Notwithstanding anything to the contrary
              -----------------
contained in this Agreement, to the extent that the actual servicing of any
Mortgage Loan can not be transferred on the Purchase Date due to the

                                                                               2
<PAGE>
 
requirements governing the timing of notice of transfer of servicing under the
Real Estate Settlement Procedures Act and Regulation X thereunder, or as
otherwise agreed by the Seller and the Purchaser, Seller shall service such
Mortgage Loans as a subservicer on behalf and for the benefit of Purchaser
pursuant to the terms and conditions of this Section 2.2. Seller shall service
such Mortgage Loans from and after the Purchase Date until the Servicing
Transfer Date in compliance with reasonable and customary servicing practices
and procedures of prudent loan servicers that service Mortgage Loans similar to
the Mortgage Loans. Within three business days after the Servicing Transfer
Date, Seller shall remit to Purchaser, by wire, all amounts received by Seller
prior to and including the Servicing Transfer Date, (including without
limitation monies received or held in reserve for the payment of taxes,
insurance premiums or other charges in connection with the Mortgage Loan, plus
interest thereon) together with the following: (a) a summary of remittances; (b)
a trial balance of Mortgage Loans, (c) a monthly collection report, and (d) as
appropriate, arrears and prepayment reports.

SECTION 2.3.  Relationship between Purchaser and Seller.  Seller is acting as an
              -----------------------------------------
independent contractor and not as an agent of the Company for purposes of
purchasing Mortgage Loans and selling such Mortgage Loans to Purchaser.
Purchaser and Seller are not partners or joint venturers with each other and
nothing herein shall be construed to make them such partners or joint venturers
or impose any liability as such on either of them. In that regard, this
Agreement is not intended to be an exclusive arrangement. Unless otherwise
agreed to by both parties, nothing herein shall prevent Seller from engaging in
other businesses or from rendering other services of any kind to any other
person or entity, including the sale of its Mortgage Loans, or the servicing of
loans. In the event that Purchaser seeks a commitment from Seller to acquire all
of Seller's mortgage loan production for some period of time, Seller must
receive approval from it's Board of Directors and receive appropriate
compensation for such a commitment.

SECTION 2.4.  Term of Agreement.  This Agreement will automatically terminate on
              -----------------
December 31, 1997, unless both Purchaser and Seller agree in writing to extend
the Agreement, after receiving approval by their respective Board of Directors.

SECTION 3.    Delivery of Documents and Other Information.  Seller will deliver
              -------------------------------------------
to the Custodian the Mortgage Loan Documents and upon receipt by Seller of the
Purchase Price, Seller will instruct the Custodian to release the Mortgage Loan
Documents to Purchaser.

SECTION 4.    Representations and Warranties of the Seller with Respect to
              ------------------------------------------------------------
Authority and Other Matters.  Seller hereby makes as of the Purchase Date the
---------------------------
following representations and warranties:

(a) Seller has not dealt with any broker or agent or other parties who might be
    entitled to a fee or commission in connection with this transaction other
    than Purchaser or its affiliates;

(b) Seller is a corporation duly organized, validly existing and in good
    standing under the laws of the State of Virginia with full corporate power
    necessary to carry on its business as now being conducted; Seller has the
    full corporate power and authority to execute and deliver this Agreement and
    to perform in accordance herewith; the execution, delivery and performance
    of this Agreement (including all instruments of transfer to be delivered
    pursuant to this Agreement) by the Seller and the consummation of the
    transactions contemplated hereby have been duly and validly authorized; this
    Agreement evidences the valid, binding and enforceable obligation of the
    Seller, and all requisite corporate action has been taken by the Seller to
    make this Agreement valid and binding upon the Seller in accordance with its
    terms;

(c) The consummation of the transactions contemplated by this Agreement is in
    the ordinary course of business of the Seller, and the transfer, assignment
    and conveyance of all documents by the Seller pursuant to this Agreement are
    not subject to the bulk transfer or any similar statutory provision in
    effect in any applicable jurisdiction;

(d) Neither the execution and delivery of this Agreement, the sale of Mortgage
    Loans to the Purchaser, or the transactions contemplated hereby, nor the
    fulfillment of or compliance with the terms and conditions of this
    Agreement, will conflict with or result in a breach of any of the terms,
    conditions or provisions of the 

                                                                               3
<PAGE>
 
    Seller's charter or by-laws or any legal restriction or any material
    agreement or instrument to which the Seller is now a party or by which it is
    bound, or constitute a default or result in an acceleration under any of the
    foregoing, or result in the violation of any law, rule, regulation, order,
    judgment or decree to which the Seller or its property is subject, or impair
    the ability of the Purchaser to realize on the Mortgage Loans, or impair the
    value of the Mortgage Loans;

(e) There is no action, suit, proceeding or investigation pending, or to the
    Seller's knowledge threatened against the Seller that, either in any one
    instance or in the aggregate, may result in any material adverse change in
    the business, operations, financial condition, properties or assets of the
    Seller, or in any material impairment of the right or ability of the Seller
    to carry on its business substantially as now conducted, or in any material
    liability on the part of the Seller, or that would draw into question the
    validity of this Agreement or the Mortgage Loans or of any action taken or
    to be taken in connection with the obligations of the Seller contemplated
    herein, or that would be likely to impair materially the ability of the
    Seller to perform under the terms of this Agreement;

(f) No consent, approval, authorization or order of any court or governmental
    agency is required for the execution, delivery and performance by the
    Seller, or compliance by the Seller, with this Agreement or the sale of the
    Mortgage Loans as evidenced by the consummation of the transactions
    contemplated by this Agreement, or if required, such approval has been
    obtained prior to the Purchase Date. However, Seller's participation in this
    Agreement will be approved by its Board of Directors;

(g) Seller used no adverse selection procedures in selecting the Mortgage Loans
    from among the outstanding mortgage loans in its portfolio as to which
    representations and warranties in this Section of the Agreement could be
    made;

(h) Seller will treat the disposition of the Mortgage Loans as a sale of assets
    for financial accounting and reporting purposes;

(i) Seller is the sole owner of, and has the full right to sell to the
    Purchaser, all rights with respect to the servicing of the Mortgage Loans
    following the Purchase Date;

(j) Seller will not solicit any of the borrowers listed on the Schedule of Loans
    Delivered in order to refinance their mortgage loan without prior written
    approval from the Purchaser; and

(k) Seller hereby warrants that it is compliance with all applicable licensing
    requirements of federal, state, and local governmental authorities,
    including, without limitation, any such requirements in the jurisdictions in
    which each Mortgaged Premises is located.

SECTION 4.1   Representations and Warranties of the Seller Regarding Individual
              -----------------------------------------------------------------
Mortgage Loans.  Seller hereby represents and warrants to Purchaser with respect
--------------
to each Mortgage Loan that, as of the Purchase Date thereof:

(a) The information set forth on the Schedule of Loans Delivered is complete,
    true and correct in all material respects.

(b) All policies of title insurance, hazard insurance, and flood insurance
    respecting such Mortgage Loan and the related premises and improvements
    thereon are in full force and effect, have been fully paid and have been
    issued by sound and financially responsible insurance companies, duly
    licensed and qualified to transact business, and are in such amounts as are
    reasonably required by Purchaser or as required by law. All such policies
    insure Seller, among others, as loss payee thereunder, in a form such that
    it may be endorsed to Purchaser as loss payee as required hereunder, and
    there are no facts or circumstances which could provide a basis for
    revocation of any policies or defense to any claims made thereon. If such
    Property is located in a flood area identified by the Federal Emergency
    Management Agency ("FEMA") pursuant to the National Flood Insurance Act of
    1968, as amended, (the "Act") a flood insurance policy issued by 

                                                                               4
<PAGE>
 
    FEMA, or one conforming to the requirements of the Federal Housing
    Administration, has been obtained and complies with this Subsection (b) and
    the Act.

(c) The Mortgage Loan is secured by a valid, existing and enforceable lien on
    the Mortgaged Premises, including improvements with respect to the
    foregoing. The Security Instrument is subject only to the lien of (a)
    current real property taxes and assessments, (b) covenants, conditions and
    restrictions, rights of way, easements and other matters of public record as
    of the date of recording acceptable to mortgage lending institutions
    generally and specifically referred to in the title insurance policy and
    which do not adversely affect the appraised value of the Mortgaged Premises
    set forth in such appraisal; and (c) other matters to which like properties
    are commonly subject which do not materially interfere with the benefits of
    the security intended to be provided by the Security Instrument or the use,
    enjoyment, value or marketability of the related Mortgaged Premises;

(d) The Note and the Security Instrument are genuine, and each is the legal,
    valid and binding obligation of the maker thereof enforceable in accordance
    with its terms subject to bankruptcy, reorganization or other similar laws.
    All parties to the Note and the Security instrument had legal capacity to
    enter into the Mortgage Loan and to execute and deliver the Note and the
    Security Instrument, and the Note and the Security Instrument have been duly
    and properly executed by such parties;

(e) The terms of the Note and the Security instrument have not been impaired,
    waived, altered or modified in any respect, except by a written instrument
    which has been recorded, if necessary to protect the interest of the
    Purchaser and which has been delivered to the Custodian. The substance of
    any such waiver has been approved by the issuer of any related Primary
    Mortgage Insurance Policy and the title insurer, to the extent required by
    the policy, and its terms are reflected on the Schedule of Loans Delivered.
    No borrower has been released, in whole or in part, except in connection
    with an assumption agreement approved by the issuer of any related Primary
    Mortgage Insurance Policy and the title insurer, to the extent required by
    the policy, and which assumption agreement is part of the Mortgage Loan
    Documents delivered to the Custodian and the terms of which are reflected in
    the Schedule of Loans Delivered.

(f) The Mortgage Loan is not subject to any right of rescission, set-off,
    counterclaim or defense, including without limitation the defense of usury,
    nor will the operation of any of the terms of the Note or the Security
    Instrument, or the exercise of any right thereunder, render either the Note
    or the Security instrument unenforceable, in whole or in part, or subject to
    any right of rescission, set-off, counterclaim or defense, including without
    limitation the defense of usury, and no such right of rescission, set-off,
    counterclaim or defense has been asserted with respect thereto;

(g) There are no defaults in complying with the terms of the Security
    Instruments, and all taxes, governmental assessments, insurance premiums,
    water, sewer and municipal charges, leasehold payments or ground rents which
    previously became due and owing have been paid, or an escrow of funds has
    been established in an amount sufficient to pay for every such item which
    remains unpaid and which has been assessed but is not yet due and payable.
    The Seller has not advanced funds, or induced, solicited or knowingly
    received any advance of funds by a party other than the borrower, directly
    or indirectly, for the payment of any amount required under the Mortgage
    Loan, except for interest accruing from the date of the Note or date of
    disbursement of the Mortgage Loan proceeds, whichever is later;

(h) Requirements of any federal, state or local law including, without
    limitation, usury, truth-in-lending, real estate settlement procedures,
    consumer credit protection, equal credit opportunity or disclosure laws
    applicable to the Mortgage Loan have been complied with in all material
    respects;

(i) The Security Instrument has not been satisfied, canceled, subordinated or
    rescinded in whole or in part, and the Mortgaged Premises has not been
    released from the lien of the Security Instrument, in whole or in part, nor
    has any instrument been executed that would effect any such release,
    cancellation, subordination or rescission;

                                                                               5
<PAGE>
 
(j) The proceeds of the Mortgage Loan have been fully disbursed and there is no
    requirement for future advances thereunder, and any and all requirements as
    to completion of any on-site or off-site improvement and disbursements of
    any escrow funds thereof have been complied with. All costs, fees and
    expenses incurred in making or closing the Mortgage Loan and the recording
    of the Security Instrument were paid, and the Borrower is not entitled to
    any refund of any amounts paid or due under the Note or Security Instrument;

(k) Seller is the sole owner of the Mortgage Loan and there has not been any
    other sale or assignment thereof. The related Note and Security Instrument
    delivered to Purchaser are the only executed copies thereof.

(l) There is no default, breach, violation or event of acceleration existing
    under the Security Instrument or the Note and no event which, with the
    passage of time or with notice and the expiration of any grace or cure
    period, would constitute a default, breach, violation or event of
    acceleration, and neither the Seller nor its predecessors have waived any
    default, breach, violation or event of acceleration;

(m) There are no mechanics' liens or claims which have been filed for work,
    labor or material affecting the Mortgaged Premises which are or may be liens
    prior to or equal to the lien of the related Security Instrument;

(n) There is no proceeding pending for total or partial condemnation of the
    related Mortgaged Premises or any part thereof and such Mortgaged Premises
    are free of material damage. No improvement encumbered by such Mortgage Loan
    is in violation of any applicable zoning law or regulation, building code or
    any valid restrictive or protective covenant or setback line. No improvement
    on such Mortgaged Premises is a mobile home or manufactured home unless
    specifically approved by Purchaser in writing prior to purchase;

(o) The Mortgage Loan was underwritten generally in accordance with the
    underwriting guidelines of the Seller as presented to the Purchaser;

(p) The related Security Instrument contains customary and enforceable
    provisions such as to render the rights and remedies of the holder thereof
    adequate for the realization against the related Mortgaged Premises of the
    benefits of the security provided thereby, including: (a) in the case of a
    Security Instrument designated as a deed of trust, by trustee's sale; and
    (b) otherwise by judicial foreclosure. In the event that such Security
    Instrument constitutes a deed of trust, a trustee, duly qualified under
    applicable law to serve as such, has been properly designated and currently
    so serves, and is named in the Security Instrument or has been substituted
    in accordance with applicable law and no fees or expenses will become
    payable by Purchaser to such trustee under the deed of trust, except in
    connection with a trustee's sale after default by the Obligor;

(q) The origination and collection practices used with respect to the Mortgage
    Loan have been in all respects legal, proper, prudent and customary in the
    mortgage origination and servicing business, and have been in all respects
    in compliance with all applicable laws and regulations. With respect to
    escrow deposits and escrow payments, all such payments are in the possession
    of the Seller and there exist no deficiencies in connection therewith for
    which customary arrangement for repayment thereof have not been made. All
    escrow payments have been calculated and collected in full compliance with
    state and federal law;

(r) Such Mortgage Loan does not fall within the coverage of Section 103(aa) of
    the Truth-in-Lending Act, as amended, nor Section 226.32 of Federal Reserve
    Board Reg Z, as amended, which govern certain mortgages commonly known as
    "high cost mortgages" or "Section 32 loans";

(s) The Mortgage Premises is free from any and all toxic or hazardous
    substances, and there exists no violation of any local, state or federal
    environmental law, rule or regulation; and

(t) No prepayment penalty, as set forth in the terms of the Note and Security
    instrument, has been waived or limited before or after an interest rate
    change date.

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<PAGE>
 
SECTION 5.    Representations and Warranties of the Purchaser.  The Purchaser
              -----------------------------------------------
hereby makes as of the Purchase Date the following representations and
warranties:

(a) Purchaser is acquiring Mortgage Loans for its own account only and not for
    any other person;

(b) The Purchaser considers itself a substantial, sophisticated institutional
    investor having such knowledge and experience in financial and business
    matters that it is capable of evaluating the merits and risks of investment
    in the Mortgage Loans;

(c) The Purchaser is a corporation duly organized, validly existing and in good
    standing under the laws of the State of Maryland with full corporate power
    necessary to carry on its business as now being conducted; the Purchaser has
    the full corporate power and authority to execute and deliver this Agreement
    and to perform in accordance herewith; the execution, delivery and
    performance of this Agreement by the Purchaser and the consummation of the
    transactions contemplated hereby have been duly and validly authorized; this
    Agreement evidences the valid, binding and enforceable obligation of the
    Purchaser, and all requisite corporate action has been taken by the
    Purchaser to make this Agreement valid and binding upon the Purchaser in
    accordance with its terms;

(d) The consummation of the transactions contemplated by this Agreement is in
    the ordinary course of business of the Purchaser;

(e) Neither the execution and delivery of this Agreement, the acquisition of the
    Mortgage Loans by the Purchaser or the transactions contemplated hereby, nor
    the fulfillment of or compliance with the terms and conditions of this
    Agreement, will conflict with or result in a breach of any of the terms,
    conditions or provisions of the Purchaser's charter or by-laws or any legal
    restriction or any material agreement or instrument to which the Purchaser
    is now a party or by which it is bound, or constitute a default or result in
    an acceleration under any of the foregoing, or result in the violation of
    any law, rule, regulation, order, judgment or decree to which the Purchaser
    or its property is subject;

(f) There is no action, suit, proceeding or investigation pending, or to the
    Purchaser's knowledge threatened against the Purchaser that, either in any
    one instance or in the aggregate, may result in any material adverse change
    in the business, operations, financial condition, properties or assets of
    the Purchaser, or in any material impairment of the right or ability of the
    Purchaser to carry on its business substantially as now conducted, or result
    in any material liability on the part of the Purchaser, or that would draw
    into question the validity of this Agreement or the Mortgage Loans or of any
    action taken or to be taken in connection with the obligations of the
    Purchaser contemplated herein, or that would be likely to impair materially
    the ability of the Purchaser to perform under the terms of this Agreement;
    and

(g) No consent, approval, authorization or order of any court or governmental
    agency or body is required for the execution, delivery and performance by
    the Purchaser of or compliance by the Purchaser with this Agreement, or the
    acquisition of the Mortgage Loans as evidenced by the consummation of the
    transactions contemplated by this Agreement, or if required, such approval
    has been obtained prior to the Purchase Date. However, Purchaser's
    participation in this Agreement will be approved by its Board of Directors.



SECTION 6.    Remedies.  In the event that a party discovers a breach of a
              --------
representation and warranty set forth in Section 4, Section 4.1 or Section 5
that materially and adversely affects the value of any of the Mortgage Loans or
the interest of the Purchaser therein, such party shall give prompt notice to
the other parties hereto. The party in breach shall have 60 days, after receipt
of notice of such breach, in which to cure in all material respects such breach.
In the event that the Seller is unable to cure in all material respects a breach
of a representation and warranty set forth in Section 4 or Section 4.1 as to any
Mortgage Loans, then the Seller shall promptly repurchase each affected Mortgage
Loan at a price equal to the unpaid principal balance of such 

                                                                               7
<PAGE>
 
Mortgage Loan plus accrued and unpaid interest thereon at the gross coupon rate
through the date of repurchase (the Repurchase Date). In the event that the
Seller repurchases a Mortgage Loan such Mortgage Loan will be returned to the
Seller.

         As an additional remedy, the Seller shall indemnify the Purchaser and
hold it harmless against any losses, damages, penalties, fines, forfeitures,
reasonable and necessary legal fees and related costs, judgments and other costs
and expenses arising out of or resulting from any claim, demand, defense or
assertion based on or grounded upon, or resulting from, (a) a breach by the
Seller of any of its covenants, representation or warranties contained in this
Agreement or (b) the servicing of any Mortgage Loan prior to the transfer of
servicing.

         The Purchaser shall indemnify the Seller and hold it harmless against
any losses, damages, penalties, fines, forfeiture, reasonable and necessary
legal fees and related costs, judgments and other costs and expenses arising out
of or resulting from any claim, demand, defense or assertion based on or
grounded upon, or resulting from, (a) a breach by the Purchaser of any of its
covenants, representations or warranties contained in this Agreement or (b) the
servicing of any Mortgage Loan following the transfer of servicing.

SECTION 7.    Successor and Assigns.  This Agreement shall bind and inure to the
              ---------------------
benefit of and be enforceable by the Seller and the Purchaser and the respective
successors and assigns of the Seller and the Purchaser. This Agreement shall not
be assigned, pledged or hypothecated by the Seller to a third party without the
consent of the Purchaser or the successors and assigns of the Purchaser which
shall not be unreasonably withheld or delayed.

SECTION 8.    Conditions to Closing.  The obligations of the Seller and the
              ---------------------
Purchaser to consummate the sale and purchase of the Mortgage Loans on the
Purchase Date are subject to the satisfaction of the following conditions:

(a) All representations and warranties of Seller and Purchaser under this
    Agreement shall be true and correct as of the Purchase Date, and no event
    shall have occurred that, with notice or the passage of time, would
    constitute a default under this Agreement;

(b) All Mortgage Loan Documents shall have been delivered to the Custodian; and
 
(c) All other terms and conditions of this Agreement shall have been complied
    with in all material respects.

         Subject to the foregoing conditions, Purchaser shall pay the Purchase
Price to Seller on the Purchase Date by wire transfer of immediately available
funds to the account designated by Seller.

SECTION 9.    Costs.  Seller shall pay any commissions due its salesmen, the
              -----
legal fees and expenses of its attorneys, and fees incurred in connection with
the transfer of the Mortgage Loan Documents to the Custodian. Seller shall
prepare the Assignment of Security Instrument and pay all recording fees with
respect to the transfer of each Mortgage Loan to Purchaser or its designee.

                                                                               8
<PAGE>
 
SECTION 10.   Notices.  All demands, notices and communication hereunder shall
              -------
be in writing and shall be deemed to have been duly given when mailed by
registered or certified mail, return receipt requested at the address listed
below or at such other address as may hereafter be furnished to the other party
by like notice. Any such demand, notice or communication hereunder shall be
deemed to have been received on the date delivered to or received at the
premises of the addressee as follows: if to Purchaser: NovaStar Financial, Inc.
1900 W. 47th Place, Suite 205, Westwood, KS 66205 Attn: Chairman, and if to
Seller: NovaStar Mortgage, Inc. 15707 Rockfield Blvd., Suite 320, Irvine, CA
92618 Attn: President.

SECTION 11.   Severability Clause.  Any part, provision, representation or
              -------------------
warranty of this Agreement that is prohibited or that is held to be void or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions.

SECTION 12.   Counterparts.  This Agreement may be executed simultaneously in
              ------------
any number of counterparts. Each counterpart shall be deemed to be an original,
and all such counterparts shall constitute one and the same instrument.

SECTION 13.   Governing Law.  This Agreement shall be governed by, and construed
              -------------
in accordance with, the laws of the State of Kansas.

SECTION 14.   Waivers.  No term or provision of this Agreement may be waived or
              -------
modified unless such waiver or modification is in writing and signed by the
party against whom such waiver or modification is sought to be enforced.

SECTION 15.   Exhibits.  The exhibits to this Agreement are hereby incorporated
              --------
and made a part hereof and are an integral part of this Agreement.

SECTION 16.   Survival.  This Agreement, and the representations and warranties
              --------
contained herein, shall survive the Purchase and shall not merge into the
purchase documents.

SECTION 17.   Amendment.  This Agreement may only be amended with the written
              ---------
consent of both Seller and Purchaser.

IN WITNESS WHEREOF, the Seller and the Purchaser have caused their names to be
signed hereto by their respective officers thereunto duly authorized as of the
date first above written.



                                            NovaStar Financial, Inc.

                                            By:       
                                                      ------------------
                                            Name:     
                                                      ------------------
                                            Title:    
                                                      ------------------


                                            NovaStar Mortgage, Inc.


                                            By:       
                                                      ------------------
                                            Name:     
                                                      ------------------
                                            Title:    
                                                      ------------------

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<PAGE>
 
                                  EXHIBIT "B"
                        List of Mortgage Loan Documents
                            and Delivery Procedures



Required Mortgage Loan Documents
--------------------------------

(1) Original Note bearing all intervening endorsements and (if applicable) the
    original recorded assumption agreement, together with the original of any
    surety agreement or guaranty agreement relating to the Note or any such
    assumption agreement, endorsed in blank.

(2) Buy-down Agreement (if applicable)

(3) Security Instrument (including any required addenda and riders) consisting
    of either the recorded original or a certified copy of the original if the
    Security Instrument is unavailable because it is in the process of being
    recorded or the original in a form suitable for recording;  

(4) Originals or certified copies of any intervening Assignment of the Security
    Instrument;

(5) Original unrecorded Assignment of the Security Instrument in blank;

(6) An original Title Insurance Policy; if any such policy has not been issued,
    a written commitment for such policy (or a copy thereof) issued by the title
    insurance company or a binder or Preliminary Title Report if the Mortgaged
    Premises is located in California.

(7) Credit file - the same file used by NovaStar during its underwriting of the
    Mortgage Loan.

(8) Servicer file - to be delivered with the transfer of servicing.

Delivery Instructions
---------------------

Mortgage Loans must be delivered to:

NovaStar Financial, Inc.
15707 Rockfield Blvd
Suite 320
Irvine, CA  92618

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