Hi Chris,
Glad to hear it works in the top level collection. At this point, I would like to confirm the following two points:
1. After you invited the Hotmail user in the top level site collection, is the user available in your Team Site? Please use check user permission button to confirm this.
2. Please create a new sub site under the Team Site to see if you can invite the Hotmail user there successfully.
Thanks,
Reken Liu