About one-fourth to one-third of Americans in the market for a new home build rather than buy. But do-it-yourselfers eager to jump on the bandwagon might want to figure out how they're going to pay for it all first.

Financing a new project involves many more steps than buying a cookie-cutter house in suburbia or one that's sat on Main Street for 50 years.

Depending on the amount of equity and cash they have on hand, potential Bob Vilas can do it any number of ways. Most, though, will have to turn to construction mortgages, and that's where things get tricky. So people should understand how the loans work before drawing up any blueprints.

"The kind of loans I do, I do all kinds of funky stuff," says Darcie Bleoo, owner of Priority Financial Group. The Stroudsburg, Pa., mortgage brokerage finances construction in the Pocono Mountains.

"Once they're educated on it, there aren't any surprises, but initially, if they're first-timers, you need to walk through the whole process from the beginning."

When you know what you want
Whether for personal reasons or practical needs, Americans of all backgrounds design and build their own homes each year rather than settle for something less. In 1997, just under 30 percent of the 1.12 million new single-family homes constructed were built by landowners or contractors working for them, according to the most recent available Census Bureau figures.

Builders pay for those homes in a number of different ways and, indeed, some 18 percent were able to use cash two years ago. But for most people, a construction mortgage is the best available option. Take George Phelan, the 47-year-old owner of Gene Parker Tool & Die Welding in Wolcott, Conn. He was able to use about $80,000 in equity from his old house to buy a lot for $59,000, dig a well on the property and have the foundation poured for a new home.

But money for the rest of the process had to come from somewhere. So Phelan checked out a few local lenders and settled on nearby Naugatuck Savings Bank. The company offered a construction loan that allowed several disbursements of money timed to specific project milestones. It also didn't require any special steps or pricing, despite the fact that Phelan acted as his own general contractor.

The mortgage permits him to make interest-only payments on the amount drawn down until he moves in at the end of this month. At that point, it will revert to a standard 15-year fixed rate and payment schedule.

"I did it for two reasons. On the personal side, this is my second home and after spending 15 years in my first home, I knew what I wanted and what I didn't want," Phelan says. "I decided that if I was going to move, I would prefer to build my own house to the specifications I wanted, not what someone else wanted.

"On the financial end," he adds, "if I cut out the middleman, that's all the less money I'd be spending on a mortgage."

Cash on hand offers flexibility
Other borrowers, such as Rick Shamakian, come into projects with more cash on hand, giving them a greater amount of financing flexibility.

The 46-year-old engineer was among several Pratt & Whitney employees relocated to Connecticut from Florida in a recent round of restructuring at the aerospace corporation. When he couldn't find the type of house he wanted in New England, he started construction on a two-story colonial in Essex.

Unlike Phelan, Shamakian will be paying the contractor's draws out of his own pocket. Once the $305,000 lot acquisition and home construction is complete, he will need to finance only the $160,000 balance remaining with what is basically a conventional, 30-year fixed rate loan from Citigroup Inc.

"The other homes that we bought were either already existing homes or, in Florida, we bought one where the developer was putting up a standard home and you could pick out the color of the carpet and a few options," Shamakian says. "But that was it. This was the first time we're building a house from scratch.

"It's been educational and it's been somewhat fun, but it's also been nerve-wracking," he adds. "Your contractor can't do anything soon enough."

Look for an all-in-one closing
Builders who do pursue construction loans, though, should do several things during the application and payment process to avoid getting tripped up. For starters, try to find a mortgage that requires only one closing, rather than one for the months-long construction segment and one for the years-long final loan period. Many lenders offer this "all-in-one" type of product, which allows consumers to pay just one set of costs for recording the mortgage, running a title search on the property, verifying credit and performing other underwriting steps.

"At the completion of construction, as opposed to a refinance, there is a modification where all we're doing is modifying the terms of the note," says Guy W. Silas, a mortgage banker at Sandy Spring Bancorp Inc.'s lending subsidiary in Silver Spring, Md. "In layman's terms, we do it in one closing instead of two."

Keep an eye out for the interest rate assessed on the construction phase withdrawals, too. Though most lenders will require borrowers to pay interest only during that step of the process, that rate can influence the size of those payments significantly. In late July, a Priority Financial customer would be required to pay interest at the Wall Street Journal Prime Rate plus 2 percentage points, or 10 percent, for example. By comparison, a Sandy Spring builder would pay interest at the prime rate minus 0.5 percentage points, or 7.5 percent.

No matter how sweet a rate deal they get, however, most borrowers should expect their construction loans to cost more than a regular mortgage for an existing home. Bleoo notes that most lenders won't allow a draw to go through until they have a chance to sign off on the construction work. That can get expensive because most of her borrowers pay about $100 for each of those inspections and need five of them performed.

Underwriting guidelines can be a little stricter with construction mortgages as well. While Bleoo says she can finance up to 100 percent of the price of a traditional home, she can make a loan for only 95 percent of the value of a construction home. Sandy Spring follows the same standard, according to Silas, although somebody who wants to start building can get 100 percent financing there by pledging the equity in the current home until it's sold. Once that sale goes through, the borrower must apply the pledged proceeds toward reducing the new loan balance.

Extended rate locks may be needed
Bankers offer one last caution to potential builders. Although most will get rate commitments on their final loans for a certain period, unexpected construction delays can push closing beyond the lock period. As a result, somebody with a 90-day lock on a 30-year fixed rate mortgage at 7.5 percent could end up paying 8 percent if it takes four months to close and rates rise in the meantime. Most lenders will let people buy a longer commitment for a few hundred dollars as protection.

Despite all of these pitfalls, lenders say there's no shortage of interested builders today. And as long as the economy remains strong and unemployment continues to hover near record lows, they see no change in sight.

"Sandy Spring has been lending in the construction arena in our part of the country for probably over 100 years now," Silas says. "The process, the procedure and all is very much the same as it's been for many, many years."