In case anyone faces similar issue, I found out why MFA selection screen keeps appearing for TOTP. The reason is that, once you select your desired MFA on orchestration step 4, using SelfAsserted-Select-MFA-Method it doesn't persist the value. It happens after, for example, if you have selected email as your MFA option, Technical Profile EmailVerifyOnSignIn used during code verification has a following reference:

<ValidationTechnicalProfiles>
  <ValidationTechnicalProfile ReferenceId="AAD-UserWriteMFAMethod"></ValidationTechnicalProfile>
</ValidationTechnicalProfiles>

UserWriteMFAMethod actually saves your value and is not being referenced by TOTP related flow. So the fix would be following, since I want to save selected MFA method only after user has made a verification, I edited OTPVerification like this:

        <TechnicalProfile Id="OTPVerification">
          <DisplayName>Sign in with Authenticator app</DisplayName>
          <Protocol Name="Proprietary" Handler="Web.TPEngine.Providers.SelfAssertedAttributeProvider, Web.TPEngine, Version=1.0.0.0, Culture=neutral, PublicKeyToken=null" />
          <Metadata>
            <Item Key="ContentDefinitionReferenceId">api.selfasserted.totp</Item>
            <Item Key="language.button_continue">Verify</Item>
          </Metadata>
          <CryptographicKeys>
            <Key Id="issuer_secret" StorageReferenceId="B2C_1A_TokenSigningKeyContainer" />
          </CryptographicKeys>
          <InputClaims></InputClaims>
          <DisplayClaims>
            <DisplayClaim ClaimTypeReferenceId="QrCodeVerifyInstruction" />
            <DisplayClaim ClaimTypeReferenceId="otpCode" Required="true" />
          </DisplayClaims>
          <OutputClaims>
            <OutputClaim ClaimTypeReferenceId="objectId" />
            <OutputClaim ClaimTypeReferenceId="otpCode" Required="true" />
          </OutputClaims>
          <ValidationTechnicalProfiles>
            <ValidationTechnicalProfile ReferenceId="AzureMfa-VerifyOTP" />
<!-- THIS WAS ADDED TO SAVE SELECTED MFA METHOD -->
            <ValidationTechnicalProfile ReferenceId="AAD-UserWriteMFAMethod" />
          </ValidationTechnicalProfiles>
          <UseTechnicalProfileForSessionManagement ReferenceId="SM-MFA-TOTP" />
        </TechnicalProfile>

Then you can reference your extension claim to skip TOTP steps:

        <!-- Call the TOTP enrollment ub journey. If user already enrolled the sub journey will not ask the user to enroll -->
        <OrchestrationStep Order="8" Type="InvokeSubJourney">
          <Preconditions>
            <Precondition Type="ClaimEquals" ExecuteActionsIf="false">
              <Value>extension_mfaByPhoneOrEmail</Value>
              <Value>totpApp</Value>
              <Action>SkipThisOrchestrationStep</Action>
            </Precondition>
          </Preconditions>
          <JourneyList>
            <Candidate SubJourneyReferenceId="TotpFactor-Input" />
          </JourneyList>
        </OrchestrationStep>
        <!-- Call the TOTP validation sub journey-->
        <OrchestrationStep Order="9" Type="InvokeSubJourney">
        <Preconditions>
            <Precondition Type="ClaimEquals" ExecuteActionsIf="false">
              <Value>extension_mfaByPhoneOrEmail</Value>
              <Value>totpApp</Value>
              <Action>SkipThisOrchestrationStep</Action>
            </Precondition>
          </Preconditions>
          <JourneyList>
            <Candidate SubJourneyReferenceId="TotpFactor-Verify" />
          </JourneyList>
        </OrchestrationStep>

Provided examples are mainly from Microsoft Authenticator TOTP and MFA with either Phone (Call/SMS) or Email verification, merged together.