Residence permits won't get processed while you're in the country as a tourist, so you apply from outside the country and wait. There are no language requirements as long as someone is willing to hire you. To get a residence permit you need to meet the quality of "support"[1], which broadly means either approximately $22,000 in savings per year of your permit OR payslips demonstrating a monthly income that meets $22,000/yr OR an employment contract from an Icelandic company.
If you go the employment route, you need a work permit. For software, this is usually done on the basis of "expert knowledge"[2]. The company usually needs to demonstrate that they're unable to hire a schengen zone citizen to do your job (otherwise you're not expert enough I guess?), and then issue you with a contract that you submit to the directorate of immigration. That's relatively informal though, and mostly means the company needs to advertise in Iceland first and show that it interviewed candidates and they weren't suitable. Iceland is heavily unionized and your work permit will need a stamp of approval from a relevant union. The first time you request this the union will want to see your qualifications. I strongly suggest becoming a member of that union to smooth things over when you get it renewed every one or two years. Iceland is charmingly small-town corrupt like that.
All Icelanders under ~60 speak flawless English, and it's pretty common for Icelanders under 30 to interleave English words into Icelandic sentences in cases where there isn't a good Icelandic word. Unless the company you apply to works heavily with Icelandic language products, it's unlikely that speaking only English would be a barrier to employment.
As for getting the job itself, Iceland is /desperate/ for good programmers. The cost of living is high, the wages are low, and the local universities don't have fabulous software degrees[3]. It's hard for Icelandic companies to hire good programmers. If you want to come to Iceland and you have a qualification, it may not be that hard. However, I suggest visiting for a holiday in June and again in February, to see what this country is really like. If you don't love it as a place to live, you won't stay long.
This might be a good place to start looking: https://www.tvinna.is/
[1] http://www.utl.is/index.php/en/basic-requirements1#support
[2] http://www.utl.is/index.php/en/residence-permits-based-on-wo...
[3] My friends tell me that slightly pre-banking-crisis, all the universities reformed their software degrees to churn out low level CRUD app webdevs to make lots of web apps for the high flying Icelandic banks. When the banks all crashed, Iceland became awash with relatively inflexible developers, and the universities haven't really refocused their coursework much, so the standard of graduates is, I am told, still relatively poor.
