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fact of the matter, our trucks (87-96) have been notorious to rot, especially in the snow belts. water, salt and crud build up under the wheel well lip in the underside thanx to ford doing a double wall inside. this doesnt dry out and allows oxidation to start. trust me, i have talked to many body shops about it and the same response was given from all...
the best way to fix it is have a body shop cut the rotted section out, weld in a new patch panel and paint it. also, if possible try to coat the wheel wells with some kind of rust inhibitor like POR-15, rustoleum (the thick, heavy kind) or even rubberized coating after u clean it out good and let dry.
POR-15 is awsome, I also use a paint from True Value Hardware stores called X-O Rust Red Mateal Primer, it takes a long time to dry but seals very well. I usually let it dry for a week or a month. POR-15 drys much faster and is a better product but more $$
there is a less expensive way but its half assed way of doing it...:-/. u can bondo over it and paint over it but rust is like cancer and it keeps comin back. sorry to say the cold hard facts. the average price to fix wheel well rot is around $7-800 for both sides and half if its for one side. that is for a new panel welded in, prep, primer, paint and wet sanding/buffing.
One trick to stop it from rusting or ever starting is to spray used motor oil inside the panels, doors and such. I soaked my tail gate with gear oil. Its sticky stuff.