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So we figured it out. We were able to connect with the db just fine from several other methods. The issue ended up being caused by what seems like a error in the connect_db_mysqli.inc file where it was skipping the

mysqli_select_db($db, $connection["dbname"]);

We changed it to

{
    global $db;

    $db = mysqli_connect($connection["host"], $connection["dbuser"], $connection["dbpassword"], "",
        !empty($connection["port"]) ? $connection["port"] : 3306); // default port in mysql is 3306

    //If no name is selected we will not be able to select a database nor create one just return
    if (!$connection["dbname"])
        return 0;
    
    //Try and select the specified database
    $selectedDB = mysqli_select_db($db, $connection["dbname"]);

    //If the db doesn't exist create the database
    if (!$selectedDB)
    {
        $sql = "CREATE DATABASE IF NOT EXISTS `" . $connection["dbname"] . "`"
            . " DEFAULT COLLATE '" . get_mysql_collation($connection["collation"]) . "'";

        if (!mysqli_query($db, $sql) || !mysqli_select_db($db, $connection["dbname"]))
            return 0;
    } else {
        //else just use the selected db and ensure that the collation is set correclty
         if ($selectedDB)
         {
            if (!db_set_collation($db, $connection["collation"]))
            {
                echo mysqli_error($db);
                return 0;
            }
        }
        else
            return 0;
    }
    return $db;
}

And now it works.

I've tried 127.0.0.1 and localhost as hostname, both of which should work. As the user I've even tried as root, and made sure that root does indeed have all privileges. I'm still running into the same error message.

I have manually created the db as per the installation instructions, with a user that has full privileges. The DB is showing when accessed through SSH, but I am still getting the error "Cannot connect to database. User or password is invalid or you have no permittions to create database."

So the first couple of errors are now taken care of. It had not so much to do with the dbname as it had to do with the fact that the db password was too long to be recognized. Once a shorter name was created, most errors went away. Now I'm only stuck with "Cannot connect to database. User or password is invalid or you have no permissions to create database." Any ideas on how to solve this one?

Using the modification gave me these errors:
mysqli_connect(): (HY000/1045): Access denied for user 'root'@'localhost' (using password: YES) in file: /var/www/html/includes/db/connect_db_mysqli.inc at line 206
mysqli_query() expects parameter 1 to be mysqli, boolean given in file: /var/www/html/includes/db/connect_db_mysqli.inc at line 194
Cannot connect to database. User or password is invalid or you have no permittions to create database.

Note: On the first page of installation it checks OK on the config_db.php file, but I have tried every search I know of to locate that file to check if the dbname is included or not, but I am not able to locate the file. Any ideas? (And yes, I did install the latest FA version as per the link given by @apmuthu)