Explanation:

For the first question, only ExpressRoute GW SKU Ultra Performance support FastPath feature.
For the second question, vnet1 will connect to ExpressRoute gw, once Vnet1 peers with Vnet2, the traffic from on-premise network will bypass GW and Vnet1, directly goes to Vnet2, while this feature is under public preview.
====Reference
ExpressRoute virtual network gateway is designed to exchange network routes and route network traffic.
FastPath is designed to improve the data path performance between your on-premises network and your virtual network. When enabled, FastPath sends network traffic directly to virtual machines in the virtual network, bypassing the gateway.
To configure FastPath, the virtual network gateway must be either:
Ultra Performance
ErGw3AZ
VNet Peering - FastPath will send traffic directly to any VM deployed in a virtual network peered to the one connected to ExpressRoute, bypassing the ExpressRoute virtual network gateway.
https://docs.microsoft.com/en-us/azure/expressroute/about-fastpath
Gateway SKU
https://docs.microsoft.com/en-us/azure/expressroute/expressroute-about-virtual-network-gateways

See the Explanation below for step by step instructions.
Explanation:
To ensure that hosts on VNET1 and VNET2 can communicate with minimal latency, you can use Virtual Network Peering. This method connects the two virtual networks directly through the Microsoft backbone network, ensuring low-latency and high-bandwidth communication.
Step-by-Step Solution
Step 1: Set Up Virtual Network Peering
* Navigate to the Azure Portal.
* Search for "Virtual networks" and select VNET1.
* In the left-hand menu, select "Peerings" under the "Settings" section.
* Click on "Add" to create a new peering.
* Enter the following details:
* Name: Enter a name for the peering (e.g., VNET1-to-VNET2).
* Peer virtual network: Select VNET2.
* Allow virtual network access: Ensure this is enabled.
* Allow forwarded traffic: Enable if needed.
* Allow gateway transit: Enable if needed.
* Click on "Add".
Step 2: Configure Peering on VNET2
* Navigate to VNET2 in the Azure Portal.
* In the left-hand menu, select "Peerings" under the "Settings" section.
* Click on "Add" to create a new peering.
* Enter the following details:
* Name: Enter a name for the peering (e.g., VNET2-to-VNET1).
* Peer virtual network: Select VNET1.
* Allow virtual network access: Ensure this is enabled.
* Allow forwarded traffic: Enable if needed.
* Allow gateway transit: Enable if needed.
* Click on "Add".
Explanation:
* Virtual Network Peering: This feature connects two virtual networks in the same or different regions, allowing resources in both networks to communicate with each other as if they were part of the same network. The traffic between peered virtual networks uses the Microsoft backbone infrastructure, ensuring low latency and high bandwidth12.
* Allow Virtual Network Access: This setting ensures that the virtual networks can communicate with each other.
* Allow Forwarded Traffic: This setting allows traffic forwarded from a network security appliance in the peered virtual network.
* Allow Gateway Transit: This setting allows the peered virtual network to use the gateway in the local virtual network.
By following these steps, you can ensure that hosts on VNET1 and VNET2 can communicate with minimal latency, leveraging the high-speed Microsoft backbone network.

Explanation:

Reference:
https://docs.microsoft.com/en-us/azure/dns/private-dns-autoregistration
https://docs.microsoft.com/en-us/azure/virtual-network/virtual-networks-name-resolution-for-vms-and-role- instances