I like water based poly because it does not yellow the wood and the drying time is so fast, I can put three coats on the material in the same time that oil requires to dry and cure with one coat.
I cannot tell you why steel wool is not recommended. I can only guess that since the vescosity of water based is much thinner than oil, you could actually erase the coats and not gain any forward motion.
I always use 220 grit ove the first coat because of the water causing the wood rise. But also I always use a good quality sand sealer first to cause a continous look in staining. I would only 220 after the first coat and then slowly add the coats on to that.