My solution
For anyone having the same problem here what solved the problem:
First of all I wanted to point out that I love my iPhone. I don't want to drag into the dirt, only tell you about a disappointing story. It turned out to be a hardware issue. Let me explain.
So, I had this issue after dropping my phone from about 1 feet with a full-body case. (Hey, tell me you never dropped your phone) I know you will all tell me it's my own fault, but read on.
I've dropped my iPhone 6 many times in the past and that never happened to me.
I figured I would try installing a new iPhone 7 camera, so I ordered a new from China via etradesupply.com for about 70$ + shipping (crazy, right?). I live in a country with no Apple Store, and "official" tech stores would charge me about 300$ for a replacement. So, it didn't make sense to go the official way. I know I voided my warranty like that, but f y Apple.
(this one is the old one actually, only for illustration purposes)
I got the replacement camera module from China, and went to a local tech shop to have them replace it for me for about 25$ and they also sealed the display so it's still waterproof, and guess what: it works again.
Proof: This is a picture taken from my iPhone 7 with the new camera module. No more blurry images. WOHOO.
Why did that happen?
I took a closer look at the defect camera module, and noticed that the camera module was loose inside the metal housing, which leads me to the theory that it became loose when I dropped it from low height.
I made a video so you can see yourself: https://sendvid.com/89ipyc0p
I don't know if it's normal that the camera module moves around like that. It would be nice if someone could confirm that.
Maybe it could be soldered but the point is that it came loose after a standard drop, and if you are experiencing similar issue maybe it's your camera module, and this shouldn't be happening.
(If you live in the US, or some other 1st world country, well then you're in luck because you have an Apple Store nearby probably, and this is probably covered by the phone's warranty. Less luck for people like who live in a developing country.)
