Just make the walls smooth. Then, prime them before wallpapering.
Grit is the number of peices of sand per inch, anotherwords the size of the sand grains. If they sold sandpaper that was 1 grit, the grains of sand would be an inch in size. Course paper like 50 grit, sands mush faster but leaves a rougher finish. 150 grit medium paper should smooth out most walls prior to papering.
If you have peeling paint, you could try a wire brush and/or paint scraper to quickly remove flaking paint prior to sanding the walls smooth.
Many people would paper right over the existing walls, but since you want it done right, some sanding is good. Don't remove all the paint, just a quick once over to smooth out imperfections. I assume you filled any nail holes as well.