This is a bug in the app. The train requires seat reservation only if you travel within Hungary (i.e. you don't cross the border), so if you go from Munich to Budapest, you don't need to buy a seat reservation. It's still advised to do so, as the train gets full quickly. It's only 3 eur at the oebb website.
You should activate the pass just before boarding your first train. You can reserve seats before that, if you want to. You should reserve via the website of train companies that operate your trains.
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