HIV places acute stressors on affected children and families; especially in resource limited contexts like sub-Saharan Africa. Despite their importance, the epidemic’s potential consequences for family dynamics and children’s psychological health are understudied. Using a population-based sample of 2,487 caregivers and 3,423 children aged 8–14 years from the Central Province of Kenya, analyses were conducted to examine whether parental illness and loss were associated with family functioning and children’s externalizing behaviors. After controlling for demographics, a significant relationship between parental illness and externalizing behaviors was found among children of both genders. Orphan status was associated with behavioral problems among only girls. Regardless of gender, children experiencing both parental loss and illness fared the worst. Family functioning measured from the perspective of both caregivers and children also had an independent and important relationship with behavioral problems. Findings suggest that psychological and behavioral health needs may be elevated in households coping with serious illness and reiterate the importance of a family-centered approach for HIV-affected children.