The Homes & Communities Agency has agreed to sell the 12ha former Shotley Bridge Hospital development site to Story Homes to build 279 homes.
Outline planning consent was agreed in 2008 and the sale agreement is subject to detailed consent, expected in November, with construction likely to start in the middle of next year.
"Our investment has tackled a number of technical issues, demolishing redundant buildings and preparing the site for private investment and a high quality residential development," said HCA North East directror Pat Ritchie.
"The project will be a real boost for Shotley Bridge and the surrounding area. The new homes will be built to a high standard of sustainability, while the environmental and travel improvements will benefit the whole community."
The deal also includes funding of improvements to the Derwent Walk, public realm, village centre improvements and play areas.
