We have an application with the funds being used to complete the construction of a dwelling around $20,000. It will not be a construction loan and we will have a 1st on the house and 50+ acres. This is not their principal dwelling currently but they will be moving in when it is complete.

Does section 35 apply since it is not their principal dwelling at closing?

The loan is to finance the purchase of their new principal dwelling therefore escrow requirements of section 35 will apply since you indicate it is not temporary financing.