The purpose of this study was to develop a valid and reliable tool for measuring the quality of the language and literacy environment in home-based settings. Based on a convergence of research on the ecological and psychological factors associated with early literacy development, the Child/Home Environmental Language and Literacy Observation (CHELLO) was developed to gauge the quality of current practices associated with positive early childhood literacy outcomes. Following the structure of the Early Language and Literacy Classroom Observation Scale (ELLCO) [Smith, M., & Dickinson, D. (2002). Early language & literacy classroom observation. Baltimore, MD: Brookes], we developed two interdependent tools: The Literacy Environment Checklist and the Group/Family Observation and Provider Interview. Inter-rater reliability using weighted kappas indicated acceptable reliability. Following this analysis, the CHELLO was administered in 128 home-based settings in four low-income urban areas. Initial evidence of its psychometric properties provided support for internal consistency. Although more research is needed, the CHELLO has the potential to serve as a useful tool for examining the language and literacy environment in home-based settings. (Contains 5 tables.)