Berpol knows a lot about these things and still posts around here from time to time. I ain't really an expert on settlement-making, but I'll offer what advice seems appropriate:
1) Yes, the 'Edit Mode' on 'Configure' needs to be checked. This lets you press CTRL+E ingame while in a empty settlement and will bring up options to edit the terrain and add objects. (I'm not 100% sure this is what Custom Settlement mappers use, but I think it's correct).
2) The full instructions/details/helpful info for editing settlements is here: http://forums.taleworlds.com/index.php/topic,57442.0.html Make sure to take a look again if you haven't already!
Best of luck. If you become serious about making a custom settlement and maybe want to submit it later to be added to the mod, make sure to check out this thread: http://forums.taleworlds.com/index.php/topic,61126.0.html It seems important to optimizing your settlement so it works for AI pathfinding.
And be sure to check this thread too for a full list of settlements that are still empty to use:
http://forums.taleworlds.com/index.php/topic,68059.0.html
