Blues say they have beaten off "more than a dozen" clubs to persuade 20-year-old Devon-born Stansfield to move to St Andrew's for a season-long stay.
Stansfield has played eight times for Fulham since signing in January 2020.
That includes his first senior goal, which came at St Andrew's in an EFL Cup tie against Blues in August 2021.
He was loaned back out to his late father Adam Stansfield's old side Exeter City last season, capping his time at his boyhood club with a final-day hat-trick to relegate Morecambe from League One.
"I have been in contact with a lot of people in the last three or four weeks and I made the decision to come here," said Stansfield.
"It has been a long time coming. It is a family club and I can't wait to get started. I am buzzing."
Blues are under American ownership following Tom Wagner's summer takeover, which now also includes investment from global sporting legend Tom Brady.
The signings of Leeds United striker Tyler Roberts, Royal Antwerp winger Koji Miyoshi, Derby County midfielder Krystian Bielik, Manchester United defender Ethan Laird, Bournemouth winger Siriki Dembele, Wolves defender Dion Sanderson, Blackpool forward Keshi Anderson and Werder Bremen defender Lee Buchanan have helped John Eustace's side make an unbeaten start to the campaign.
Blues have picked up seven points from a possible nine and are through to the second round of the EFL Cup, in which they host Cardiff City on Tuesday.
But first they face Plymouth Argyle at St Andrew's on Saturday.
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