How then, do we receive His mercy?

Question:

How do you understand "not by works" in Eph 2:9 and what does it apply to?

The same way that I do in Titus 3:5.

Titus 3:5 says, "not by works of righteousness we have done".

Titus 3:5 Not by works of righteousness which we have done, but according to his mercy he saved us, by the washing of regeneration, and renewing of the Holy Ghost;

So, Ephesians 2:9 says, in essence:

9 Not by works of righteousness which we have done, lest any man should boast.

In other words, God requires us to do works of righteousness. But that isn't what saves us. What does?

Titus 3:5 says:

but according to his mercy he saved us,

What does that mean? Well, let's go to the Old Testament:

Exodus 20:6 And shewing mercy unto thousands of them that love me, and keep my commandments.

In other words, in order to receive God's mercy, we must love Him and keep His Commandments.

But the works don't save us. They are a prerequisite to receive His mercy. 

How then, do we receive His mercy?

by the washing of regeneration, and renewing of the Holy Ghost;

What's that? That's a description of Baptism. In other words, it is in the Sacraments, that those who have done the will of God, receive His mercy. In other words, His grace.

So, how does this relate to Ephesians 2? Let's look at Ephesians 2:8

8 For by grace are ye saved through faith;

This is a very succinct and apt description of the Sacraments. It is in the Sacraments that God pours out His grace upon those who make a proclamation of faith. 

and that not of yourselves: it is the gift of God:

The Holy Ghost is God. Therefore, this gift is the way in which St. Paul describes the washing of regeneration and renewal of the Holy Ghost in this letter. This also ties back to Acts 2:

38 Then Peter said unto them, Repent, and be baptized every one of you in the name of Jesus Christ for the remission of sins, and ye shall receive the gift of the Holy Ghost.

In a nutshell:

Only those who do good works are saved by God.