"Is she her grandmother?"
Translation:Är hon hennes mormor?
I think if one would use sin here, the sentence would mean that she is both the grandchild and the grandmother, that is, that she is married to her own grandfather.
It's counting "mormar" as a typo but doesn't it technically mean the same thing, just her mother's grandma instead of her father's?
The second word defines who it is; the first is whose it is. So you're talking about the maternal grandfather in your question, not the paternal grandmother.
Is there a generic term for grandmother that could mean either maternal or paternal side?
No. There is a generic term for which gender the person themselves is (morförälder = mother's parent, farförälder = father's parent), but not for which side of the family they come from.
Why doesn't the V2 rule apply here? IOW, why is "Hon är hennes mormor?" incorrect?
Because this is a question so the V2 rule does not apply. A question either begins with a question word (när, varför, hur, vad, vem...) or a verb. Much the same as in English where we flip the subject and the verb.
Your sentence “Hon är hennes mormor” is a statement: “She is her grandmother”