Can I use a Home on SD Setup with a FAT/VFAT card?
No, not really. Well you might be able to create the equivalent of a cramfs file which contains your filesystem on the fat partition but which is itself mounted, but I'm not quite sure whether that would work for jffs2 (as cramfs is read only - or am I wrong).
The answer is perhaps; with a fair bit of effort.
Is there any reason for not using ext2?
Can I use a 40/24 Kernel and store things on my FAT/VFAT card like the 32/32 image TKCRom uses?
I don't know about this 32/32 image, but normally this means 32MB RAM-disk and 32MB 'RAM', so I presume so. No matter what memory layout you have you can always store and install (depending on the format) on the SD/MMC (and CF) card.
Si