Key SBA Construction Lending Changes in SOP 50 10 8

How SOP 50 10 8 Affects Your Construction Lending Strategy

The SBA’s updated SOP 50 10 8, effective June 1, 2025, introduces several key changes to the construction loan provisions for 7(a) loans. While the core framework remains intact, SBA made adjustments that affect bond thresholds, documentation flexibility, and removed a documentation requirement. Here’s what lenders need to know.

1)  Updated Standard 7(a) Loan Threshold Impacts Bonding Waivers

What changed: SOP 50 10 8 now defines Standard 7(a) loans as those exceeding $350,000. In alignment with this update, the SOP lowers the construction cost threshold for automatic waivers of performance bonds, labor and materials payment bonds, and builder’s risk/worker’s compensation insurance from $500,000 to $350,000.

What it means for lenders: More loans now fall outside the waiver scope. For construction components over $350,000, lenders must either:

• Obtain the required bonding and insurance documentation; or
• Rely on an SBA-approved “blanket waiver” path using third-party or internal construction management that “provides commercially reasonable and prudent monitoring including funds control for all disbursements.”

2)  Removal of the “Do What You Do” Philosophy

What changed: The SBA has removed all references to the “do what you do” standard, which previously allowed lenders to follow their internal commercial lending policies when SBA guidance was silent—particularly for loans of $500,000 or less. This deference to lender discretion has been removed from Section B and throughout SOP 50 10 8. The SBA now requires that all lenders verify financial information for all SBA loans—both 7(a) and 504—regardless of loan size.

What it means for lenders: Lenders can no longer rely solely on internal non-SBA commercial credit practices for smaller loans without documentation. While the SOP still allows some flexibility for 7(a) Small Loans under $350,000, SBA expects financial verification and prudent oversight, especially when construction is involved.

This doesn’t mean every small loan requires the “full boat,” but it does mean site visits, staged or monthly disbursements, document and cost reviews, or basic contractor reviews may be warranted depending on the project’s complexity and risk. While some prudent lenders already apply these practices, others treat these loans like conventional commercial deals and may take the risk of blanket funding with limited or no monitoring—an approach that may not reflect the level of oversight typically warranted given the project’s size and construction risk. In the event of an early default, failing to exercise prudent construction loan management could risk partial or full denial of the SBA loan guaranty.

For loans above $350,000, full adherence to SBA construction protocols—including bonding or approved alternatives—is required. Lenders should revisit their policies to ensure they treat each project with the level of care it requires.

3)  Greater Flexibility for DIY Cost Justification

What changed: In SOP 50 10 7.1, DIY (do-it-yourself) construction cost estimates had to be supported by two bids by unaffiliated contractors. SOP 50 10 8 now allows lenders to justify costs using either:

• Two bids by unaffiliated contractors; or
• One estimate by a third-party construction management firm; or
• One estimate from the lender’s internal construction management team (if they routinely manage similar construction loans).

What it means for lenders: Lenders now have more flexibility when underwriting self-managed projects—particularly helpful for institutions with internal construction oversight. These projects often have lower labor costs because the borrower self-performs the work. While material costs are generally consistent with market rates, labor savings can make it harder to compare against traditional contractor budgets.

Despite the added flexibility, SBA still warns that DIY projects are high risk and require careful documentation. To ensure the borrower’s cost estimates are reasonable and the project is feasible, a Document and Cost Review or Project & Budget Review is highly recommended. Additionally, while a formal Contractor Evaluation may not apply in the traditional sense, lenders should conduct equivalent due diligence to verify that the borrower (or any related party self-performing the work) holds the appropriate licenses, has relevant construction experience, and is capable of managing the scope of the project.

Lenders should also be cautious of owner-builders attempting to include profit or overhead in the construction budget. Per SBA policy, borrowers cannot earn a profit on self-managed construction; any such markup is likely to be rejected by SBA during review.

4)  Omitted: SBA Form 601 Requirement

What was removed: SOP 50 10 8 omits all mention of SBA Form 601 (Applicant’s Agreement of Compliance). This form was required to be executed by both the borrower and contractor for any loan involving construction work over $10,000. Under SOP 50 10 7.1, lenders were required to collect the form for construction loans over $10,000 and as part of the documentation checklist for projects over $500,000.

What it means for lenders: SBA Form 601, which certified borrower compliance with federal nondiscrimination and affirmative action rules, is no longer required. The change—driven by Executive Order 14173, which rescinded affirmative action requirements for federal contractors—made the form obsolete, resulting in one less document for lenders to collect and track.

5)  New Standardized Hazard Insurance Threshold 

What changed: Although not under the Construction Loan Provisions section, SOP 50 10 8 establishes a single hazard insurance standard, requiring hazard insurance on all pledged collateral for both SBA 7(a) and 504 loans valued over $50,000 (reduced from the previous $500,000 threshold for 7(a) loans). This change also eliminated the previous blanket requirement for hazard insurance on all 504 project properties being acquired, refinanced, or improved by the loan, regardless of size. In addition, the SOP adds that an SBA loan cannot be approved if required hazard insurance is unavailable.*

What it means for lenders: For the collateral under construction, a Builder’s Risk Insurance policy (required under the Construction Loan Provisions) may satisfy this requirement if it meets SBA standards (e.g., full replacement cost coverage, mortgagee clause, etc.). However, this does not waive the broader hazard insurance requirement for all pledged assets. If other assets are pledged, separate hazard insurance policies must be obtained to cover those assets. It’s also important to note that Builder’s Risk Insurance only applies during the construction phase. Once construction is complete, the borrower must obtain a standard hazard insurance policy (e.g., commercial property insurance) covering the finished structure to maintain compliance with SBA requirements. Lenders should be sure to update their loan files post-construction, upon substantial completion, or when a commercial Certificate of Occupancy is issued with the borrower’s updated hazard insurance policy notating that the lender is named a Loss Payee on the policies. As individual circumstances may vary, lenders should consult SBA guidance or counsel for further clarification on hazard insurance requirements.

* NOTE: For SBA Express and Export Express loans, lenders may waive hazard insurance requirements if they determine it would pose an undue burden—but must document the rationale in the loan file.

6)  Bonus Improvement: Linked Regulations Throughout SOP

SOP 50 10 8 now includes live hyperlinks to all relevant Code of Federal Regulations (CFR) citations. This small formatting change makes it significantly easier for lenders and risk professionals to reference authoritative guidance during underwriting and documentation reviews.

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While SOP 50 10 8 doesn’t radically change how SBA construction loans are underwritten, lenders should still review and update their construction loan policies, checklists, and templates to ensure alignment with the new guidance. To assist SBA construction lenders in navigating the SBA SOP 50 10 7.1’s requirements for maintaining compliance, Partner has developed an SBA 7(a) Construction Loan Checklist for your convenience