I have encountered several clients who started construction of a home on their own nickle, expecting to get a construction loan to finish the last 10 -20 or 50%. Only to find that most banks won't lend on a house if construction has already started. I can't speak for the rest of the markets, but at least in our area of Eastern Washington, you have some choices. You CAN get a construction loan to finish a house, or to buy a partially completed home. We have several spec homes in our market that the builders walked away from; fortunately they were dried in, so they are in good shape. Someone will be able to come along and buy those with a construction loan which will provide the funds to both aquire the house and pay a contractor (or the homowner) to finish it. These type of deals are going to require at least 20% down on the total cost.
So two main points: 1) If you want to start building with your own cash, make sure you know where the money to finish is going to come from, and 2) don't do this if you have messed up credit- I had to turn away a guy with $300k into his house because he trashed his credit over the last few years (ouch). Construction costs are very low right now, I am currently working on construction loans for Winthrop, Okanogan County, Leavenworth, Chelan, Wenatchee, and Moses Lake, and all are seeing great prices, although some materials are starting to rise. If you need a contractor in our area contact the Homebuilders Association for a referral.