How to change 1099-R form box 7 from a 1 to a 2?

There is an exception to the 10% early distribution penalty for a first time home purchase if the distribution was from an IRA and the amount was $10,000 or less.  There is not an exception if the distribution was from a 401(k) account.

If this was for a first time home purchase and from an IRA then after completing the entry of the Form 1099-R you will come to a screen to select the exception to the penalty.

You cannot change the code in box 7 of the form on your own.  If the code is incorrect then you would need a corrected Form 1099-R from the plan administrator.

I contacted Fidelity and they said only the IRS can change that code with validating documentation.  I also read about form 1096 to submit but I need help.

You would not change the code. If you proceed with the interview in the 1099-R section, you will be asked if you qualify for an exception. The distribution must have been from an IRA, not an employer retirement plan.