I tried all the recommendations but nothing worked.

However, my friend was able to figure it out and we got it working.

The host opened the lobby and invited the other player, you get lobby closed prompt.
The trick to making it work is to spam the invite once they are trying to connect to the lobby, for some reason them spamming the invite on steam causes it to see the lobby is open. I was able to join after that.

Nothing else was needed or changed.