Going back to the start it looks like only one bank of cylinders are affected. Fortunately you may only have to do one head and not both. Coolant in the cylinder is quite definitive = failed head gasket likely caused by warped or cracked head (hopefully not cracked). The previous owner may have just changed the head gasket as a band aid and traded the vehicle. The only way to do it properly is to pull the head and have a good machine shop measure and take the warp out. As little as possible though because any material removed off the head is increasing your compression.
My theory is that the water pump had a catastrophic failure and the engine overheated. These pumps are/were notorious and when they go they go. Always watch your coolant levels (monthly at least) as regular dropping is an indication that the pump and/or crossover is starting to leak.