This is another small issue that I spent more time on that I needed.
Noticing a trend yet?
What might not be apparent to some is that domain functional level and forest functional level are changed in two separate yet similar locations. I ran into this when trying to install a 2012 R2 DC into a 2003 environment.
To change the domain functional level you need to do it from AD Domains and Trusts under the domain named object
To make a change to the actual forest functional level you need to go up one area in the tree.
One small click for man, one giant difference for your environment...or something like that, I'm not an astronaut.