We have seen this issue before with Hotmail where their server will sometimes block you from adding your email account and will only give an error that the username and password are incorrect (when you know you are actually adding the correct information). Sometimes it helps to log in to your Hotmail account from the web and then try again a little later to reconnect your account.
If that doesn't work, below are some instructions from Microsoft- they might help. If not, you may unfortunately, have to contact Microsoft's support team to see why their server is blocking the connection.
There are times that Microsoft tags the account access from an app as suspicious activity. At this point, we recommend that you verify your account first through Hotmail on the web. Once that's done, try to set the account up in the app with correct IMAP settings that can be found on this link. http://windows.microsoft.com/en-us/windows/outlook/send-receive-fro...
You will need to click the "This was me" button for the suspicious activities from EasilyDo which uses IMAP.