Homology modeling uses the amino acid sequence of a target protein and the 3D structure of an evolutionarily related template protein to generate a model of the target protein's structure. It involves searching for a template, aligning the target and template sequences, building the target protein backbone based on the template structure, modeling loops and side chains, optimizing the model structure, and validating the model. Homology modeling is most accurate when the sequence identity between the target and template is above 30%. It provides useful information about conserved regions and residues but has limitations for modeling insertions, deletions, and side chains.