What to think when asked to self-fund research? I applied to a funded advertised PhD position about 7 weeks ago... I heard nothing between then and a few days ago when I got an email from them saying that they “wondered” whether I would be willing to self-fund my research. I let them know that I wouldn’t be able to do that and have heard nothing back from them since... The issue here is that I don’t know how to take this.

I’m under the impression that my application was well above average (I had it looked over by several academics I know) and I’m pretty sure that I was one of the first people who applied, if not the first. 

I just want to know if I should take their question to mean that they are not willing to fund my research. Is this standard practice? And if it is, what does it mean?
Answering for the UK and for not-STEM: YMMV in other locations or subjects.

In such a situation it is very likely that you have not been given the funded position. If I were to speculate here, the internal decision about the funded position was likely made and whoever contacted you assumed you had already been notified that you did not get it. However, it is certainly acceptable and appropriate for you to ask about the status of that application and you need not hesitate.

However, to put things in perspective, my subject area recently had over 100 applicants for 4 funded PhD positions (and 86 applicants for a single post doc position). It certainly didn't matter at all who applied first as no one looks at the applications until the closing date, and we don't look at them in the order they come in. While you might believe your application was strong, and it might be strong, if you are facing a similar applicant to award ratio, your prospects aren't good.