Alveolar type 2 (AT2) cells maintain lung health by acting as stem cells and producing pulmonary surfactant. AT2 dysfunction underlies many lung diseases, including interstitial lung disease (ILD), in which some inherited forms result from the mislocalization of surfactant protein C (SFTPC) variants. Lung disease modeling and dissection of the underlying mechanisms remain challenging due to complexities in deriving and maintaining human AT2 cells ex vivo. Here, we describe the development of mature, expandable AT2 organoids derived from human fetal lungs which are phenotypically stable, can differentiate into AT1-like cells, and are genetically manipulable. We use these organoids to test key effectors of SFTPC maturation identified in a forward genetic screen including the E3 ligase ITCH, demonstrating that their depletion phenocopies the pathological SFTPC redistribution seen for the SFTPC-I73T variant. In summary, we demonstrate the development of a novel alveolar organoid model and use it to identify effectors of SFTPC maturation necessary for AT2 health.