The coffee industry is under growing pressure to implement sustainable practices while enhancing product value. Food-grade microbial fermentation (FMF) offers a viable pathway for valorize coffee and its by-products, thereby supporting the sustainable transformation of the coffee sector. This review systematically elaborates on the selection of fermentation microorganisms and their functional properties, evaluates fermentation-induced changes in the nutritional and bioactive constituents of coffee, and elucidates the underlying mechanisms facilitating the transformation and release of these components. Furthermore, the review analyzes the influence of microbial activity on the flavor and aroma profile of coffee and summarizes the health-promoting effects enhanced by fermentation, together with their associated molecular mechanisms. Safety aspects related to FMF are also critically discussed. Accumulating evidence indicates that fermented coffee exhibits a broad spectrum of bioactivities, including antioxidant, antimicrobial, hypolipidemic, antidiabetic, neuroprotective, and anti-inflammatory effects. These properties support its application in the development of functional beverages such as probiotic-enriched and reduced-caffeine coffee products. Additionally, FMF enables the transformation of coffee by-products into high-value products such as functional ingredients, enzymes, and organic acids, offering a viable strategy for waste reduction and economic optimization. The originality of this review lies in its integrative synthesis of recent advances in FMF from the perspectives of coffee quality enhancement, mechanisms of health effects, and safety risk management. By constructing a comprehensive analytical framework of "fermentation regulation-component transformation-functional realization," this review provides clear academic guidance for the future development of fermented coffee in functional foods and sustainable industrial applications.