This multi-method longitudinal study evaluated how changes in maternal sensitive parenting may operate as an indirect factor linking family instability and the development of child externalizing problems over time. This study also investigated how mothers’ stress reactivity within the sympathetic nervous system (SNS) may moderate the association between family instability and the development of maternal sensitivity. Participants were 235 families with a young child (Mage = 2.97 years at the first measurement occasion) and these families were followed for two annual measurement occasions. Maternal sensitivity was observed during two discipline tasks (i.e., forbidden toy, discipline discussion tasks), and maternal SNS stress reactivity was indicated by their salivary alpha-amylase (sAA) reactivity to an interpersonal stressor. Findings revealed significant direct effects of family instability and family instability-x-sAA reactivity interaction in association with the change in maternal sensitivity over time. For both tasks, mothers with greater sAA reactivity exhibited stronger associations between family instability and the growth of their sensitivity. Tests of indirect effects indicated that change in maternal sensitivity operated as an indirect factor between family instability-x-sAA reactivity interaction and the change in child externalizing problems. The present findings have important implications for understanding parental and child sequelae associated with unstable family contexts.