Fail mode

I rather have bad terraining skills, so any comments would be appreciated.

Looks good if you actually continued this because right now, yup, it still looks bad. Water flowing from the Top Island looks weird for the water is not with the height in the island and also the Top Island has no water source of any sort so its weird that there is water flowing from out there. But I am quite interested on where you got the Top Island? Is it a doodad like the Floating Outland Doodad or a trick to terraining?

Rocks looks really stretched which makes it bad, I suggest change it to something more that even if you make it big, it will not be that noticeable. Waterfall looks good though on what part of water does it fall? Ground? Looks unrealistic. Also, smoothen the sharp grounds there with Smooth Tiles.

You could actually make a good terraining showcase here actually, the idea in here is clean though the execution is not that expected. I suggest you continue this and add some fog (white looks so neutral), some custom skies that best fits the idea of the terrain you have.

Well, from how I look at it, you haven't even finished the terrain. Try finishing it first THEN judge its appearance. Terrains might look ugly at first but when you finish it, it could look a 100% better.

The rocks are fine. You just need to spam it a little bit more using various sizes. If you want to achieve a rockier scene, try lowering those mountains and replace it with rocks. Add trees to the mountains by lowering or elevating it. Grass and other environmental doodads will help. Don't spam it too much though. The waterfalls from the floating island could use a bit of lowering so that its tips are flowing from the tip of the island and not from the top.

Anyway, GJ. Finish it though

I need some guidance on how I should apply custom water to the lower ground, where the edges are visible and look unrealistic..

You could follow this tutorial as a guide for applying water not using the default one which uses Shallow Water and Deep Water: Terraining - Water Level

I use the UTM's custom water tiles, not lower tools since I use that for an even lower ground. Would encasing the water in hills/rocks do?
Oh and I made the top island by changing outland rocks' texture and re-wrapping it.

It would do and I think make it better and thanks for the information about that floating rock's existence.

Cute!

Looking (Na)Grand!