How come when I m placing or receiving call photo of contact oversized and blurry iPhone

It has to do with the resolution of the picture you are using for the contact. The lower the resolution, when it is increased to full screen, it pixilates, like any other photo would when it has been zoomed. Contact pictures added from the phone will be full screen, contact pictures added in Outlook will only be thumbnails in the corner.

Well it automatically added pictures from facebook for all of my contacts. Does that mean that since the individual people chose those pictures that I can't fix it?

That's correct. People chose low resolution photos.

Okay, you didn't say that you brought over the pictures from Facebook. Checking the iOS manual does not discuss anything about Facebook profile pictures, so I cannot answer that question for you.