Does anyone know if it is possible to symlink the home directory to an sd card? If so should I be using ext3?

I'm not sure.

I have successfully symlinked ~/MyDocs/.images to /media/mmc1/pictures and the like and the file manager handles it without any problems. Much handier to save everything directly to the media card anyway, right?

I've also added a symlink ~/MyDocs/downloads to /media/mmc1/downloads and it shows up in the main "my-tablet-name" list of dirs (without having to first open the "my-media-card-name" folder first).

Anyway, I'd say try it and let us know. As to whether you should have it be ext2/3, I'd say try it with vfat first and only use ext2/3 if some program can't handle it. If a program needs to execute a program in your home dir, you could always modify /etc/fstab and add exec or remove noexec from the mmc1 line's options. A possible problem with vfat is if you use ssh to get into your tablet (like I do). You can't mark the ~/.ssh/id_dsa file as readable by the file's owner but not by anyone else, which is a requirement (ssh will not run unless the permissions are correct), so for that you'd have to go with ext2/3.