Simply put you can choose a class such as hot hatchback and homoligation will say what horsepower, tires and PI you can have(and it appears to always be the same rules regardless of series so it's not like you get faster hot hatch homoligation rules later). You can add and remove parts within those bounds and using the tuning screen.
I would have preferred more flexibility. For example I really disliked my first muscle car race because the default homoligation builds had stiff suspension, better tires, upgraded transmissions and cam upgrades. It was like I wasn't driving a 1969 Charger because it may as well have been a C5 Corvette. It would be way more fun if homoligation ramped up with championship level! Early championships could have old-school muscle car floaty over-the-top torque fun and progress to the whole pro-touring vibe later on. But instead every muscle car is pro-touring from start to finish(I haven't tested out removing the mods and handicapping the car, maybe the AI handicaps its cars to match...too close to bed time maybe somebody else can shed light).
Also, I just spent like 2 hours worth of race winnings on a Lancia Stratios and homoligation turned it into pure death. 600 horsepower, 1900 pounds, close ratio gearing and gravel rally suspension setup. Even after I changed the suspension and gearing I find it incredibly hard to use. In a way it is fun and the game feels great...BUT there are a lot of half-baked ideas in the game.