2003 Toyota RAV4 Head Gasket bad engine

Engine Mechanical problem
2003 Toyota Rav4 4 cyl Front Wheel Drive 120, 00 miles

So my head gasket cracked on my Rav4. I took it into shop. They quoted me a price (said it might be somewhat more depending upon what needed to be done with headgasket). Heft expense, but other than routine maintainence, have not had to spend a dime on the car until this point. I told them to go ahead. After several days of dawdling, telling me it was going to be done when it wasn't, I got a call saying it would cost me about $100.00 more than originally expected. OK, I can handle that. Tells me my car will be ready sometime tommorrow. Good! A couple hours later, I receive a call saying that they received the head back (they had to send it out) and that when mechanic started putting it back in, they discovered the threads which are required to bolt the head back into engine are stripped and that there was no way the mechanic could tell this until he actually started putting the head back in. So he recommends a used engine which will cost me in addition to the cost for repairing the head, taking it out, etc.
2 questions.
1.) Is it true the mechanic could not have know about the stripped threads before?
2.) Does putting a used engine in the car work out? How do you know if it's a decent engine?
3.) Should I pay for the head repair and labor, plus the labor and parts for a "new" used engine?
Thanks in advance for your feedback.