So I had a nice chat with the bank manager. It did look like the rep we had been dealing with had mixed up the plans and forgotten about our primary renovation option - with just the second floor. Even though this had been our main goal originally.
The end result is that we are resubmitting the info and they will have an appraiser re-evaluate the second floor renovations alone and see if it helps the numbers to get our approval. I contacted the contractor and he seems pretty good about it. He sent through an updated detailed quote and I have forwarded it along to the bank.
The manager said that they'll try to push it along a bit quicker and hopes to let me know (one way or the other) by next weekend. If it is approved and we still have our slot, it could be a whirlwind time for the next month as we pack and get things ready.
It might be a bit of a hassle, but it would be one I would gladly go through for the end result.