Its annoying if youre trying to use a non-portrait image.
OS X Daily has a simple workaround.
Find the photo you want in the Photos app and open it up.
Tap the picture so the editing tools disappear.
Tap the Home and Power button to take a screenshot.
Thatll get rid of the weird zoom, though it will have a black border around it.
Still, its better than the alternative.
Stop Zoomed Wallpaper Resizing on iPhone & iPad with a Workaround| OS X Daily