Lynch, the fourth of six children, was born March 31, 1955, in the neighborhood of South Boston. He was raised with his five sisters in the Old Colony Housing Project. His father, Francis Lynch, was an ironworker who had dropped out of school in the eighth grade. His mother, Anne (née Havlin), was a night-shift post office worker. Both parents came from fourth-generation South Boston families. He attended St. Augustine Elementary School and South Boston High School. During high school vacations he began working in construction alongside his father. After graduating from high school in 1973, Lynch became an apprentice ironworker. For the next six years he worked on high-altitude structural ironwork throughout the United States for various companies, including General Motors and U.S. Steel.

He was arrested in 1977 for smoking marijuana at a Willie Nelson concert at the Illinois State Fair, leading to a $50 misdemeanor fine. He was again arrested in 1979 for assault and battery of six Iranian students at an anti-American protest in Boston, a charge which was later dropped. Around this time, he developed "a Problem with alcohol," leading him to join Alcoholics Anonymous. (He reportedly stopped after meeting his Future wife several years later, although he continued to attend occasional meetings through the 2000s.)

Having personal experience with worker safety concerns, Lynch found himself with aspirations beyond his trade. When a 1979 blizzard forced his project in Wisconsin to shut down, he spent the extra time taking courses at the University of Wisconsin. Shortly thereafter, his father was diagnosed with cancer, and so Lynch returned to Boston. In the early 1980s Lynch was elected to the executive board of the Iron Workers Local 7 union. At age 30 he was elected President of the board, the youngest in the local's history. During this time he spent his nights and weekends attending the Wentworth Institute of Technology, from which he graduated cum laude with a bachelor's degree in construction management in 1988.

Lynch was a one-time tax delinquent. In the mid-1980s the city of Boston placed liens on four properties he owned due to several thousand dollars of unpaid property taxes. He owed $2,000 in overdue taxes to the state of Massachusetts from 1985 to 1998, and for several years owed $4,000 to the federal IRS.

That year he led a three-week labor strike, refusing to sign a contract with the Associated General Contractors, despite pressure from within his union. The union international ultimately signed the contract without Lynch's approval, causing him to file suit against them. He would later remark, with regard to his political career, "Nothing I ever do will be as volatile as being union President during those times." This debacle forced him to miss the first three weeks of classes at Boston College Law School, where he had enrolled. Despite the setback, he graduated with a J.D. in 1991. After graduating he joined the law office of Gabriel O. Dumont, Jr., representing labor unions and unemployed workers.

Lynch dated Margaret Shaughnessy for 10 years before the two married in 1992. Shaughnessy, an aide to state Senator Marian Walsh, was from another South Boston family, one of seven children, and majored in graphic design at the Massachusetts College of Art. She had gone to high school with Lynch's sisters, and she and Lynch were members of the South Boston Residents Group. As of 2010, Stephen and Margaret Lynch live in South Boston with their daughter Victoria Bailey Lynch and a niece, Crystal Shaughnessy.

In the September Democratic primary, Lynch's main opponents were state Senators Cheryl Jacques, Brian Joyce and Marc Pacheco. During the campaign, Lynch faced criticism as his past improprieties were uncovered, including two arrests, defaulting on student loans, and a long history of tax delinquency. He was attacked by gay rights advocates for "a history of supporting anti-gay legislation." Despite these setbacks, Lynch maintained strong local support going into the primary. As Lynch pulled ahead in polls and fundraising, Jacques and Joyce attacked his 1994 racial violence case and subsequent positions on hate crime as evidence that he was not supportive of civil rights.

When the President of the Massachusetts Senate, william M. Bulger, announced his resignation from his 1st Suffolk seat in late 1995, Lynch filed nomination papers for the special election to replace him. Bulger's son, attorney william M. Bulger, Jr. ran for the seat. Another Lawyer, Patrick Loftus, also ran for the Democratic primary. The race grew from the grassroots of South Boston, with neighborhood issues such as development, crime, and education ruling the debate. The candidates declared their mutual respect. In a stunning victory, Lynch won the Democratic primary in March 1996, defeating Bulger Jr. and Loftus 56–35–9%. In April, he defeated Republican Richard william Czubinski 96–4% and was inaugurated on May 1, 1996. He won re-election unopposed in 1996, 1998, and 2000.

He was sworn into the 107th Congress on October 23, 2001. The ceremony had been delayed for a weekend, as the 2001 anthrax attacks had led to a shutdown of Congressional office buildings. In a press conference after his swearing-in, Lynch remarked on the unlikelihood of his career path, comparing himself to Jed Clampett of The Beverly Hillbillies.

Lynch won re-election unopposed in 2002, 2004, and 2008. In 2006, Republican perennial candidate Jack E. Robinson III decided to challenge Lynch, and was defeated 78%–22%. After voting against the Affordable Care Act, he was challenged in the 2010 Democratic primary by Mac D'Alessandro, a first-time candidate for office. D'Alessandro served as the New England political Director for the Service Employees International Union (SEIU), which spent almost $300,000 on direct mail and other support for him. The Boston Globe also endorsed D'Alessandro. In September, Lynch defeated him 65%–35%. In November, he defeated Republican Vernon Harrison and Independent Candidate Phil Dunkelbarger. After redistricting, Lynch decided to run in the newly redrawn Massachusetts's 8th congressional district in the 2012 election. His new district includes the city of Quincy, Massachusetts and some other towns on the South Shore. In November, he defeated Republican Joe Selvaggi 76%–24%.

On social issues, Lynch is considered a conservative to moderate Democrat. He is pro-life and has been attacked by pro-choice group NARAL. He sided with conservatives in the 2005 Terri Schiavo case, voting for federal court intervention in the case. In more recent years, he has advocated for and defended funding for Planned Parenthoood. He has sided with Democratic Leaders on gay rights issues, however, opposing a Federal Marriage Amendment and supporting granting medical benefits to domestic partners of federal employees. He supports same-sex marriage.

Lynch has been a member of the House Financial Services Committee since his first term. According to CQ, Lynch supported President George W. Bush's agenda one-third of the time, which was average for Democratic House members. For instance, he supported the Housing and Economic Recovery Act of 2008, which addressed the subprime mortgage crisis, but opposed the Emergency Economic Stabilization Act of 2008 which created the Troubled Asset Relief Program. He has supported President Barack Obama's economic agenda, including the American Recovery and Reinvestment Act of 2009 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010.

Upon the death of U.S. Senator Ted Kennedy, Massachusetts state law triggered a special election to be held in January 2010. On September 4, 2009, a representative for Lynch took out nomination papers to run in the special election. After speaking with his family and citing the short time frame in which to conduct a campaign, Lynch decided against seeking the Democratic nomination for the seat.

Lynch is a moderate Democrat by Massachusetts standards, but a moderately liberal one by national standards. He generally votes more moderate on social issues and liberal on economic and environmental issues. "Calling me the least liberal member from Massachusetts is like calling me the slowest Kenyan in the Boston Marathon," he remarked in 2010. "It's all relative." He is strongly pro-labor and has focused on bringing Manufacturing jobs to his district. He is a co-founder and co-chair of the Congressional Labor and Working Families Caucus.

Lynch announced his candidacy for the U.S. Senate on January 31, 2013, seeking to fill the seat then held by John Kerry, who resigned to become U.S. Secretary of State. Lynch's candidacy in the 2013 special election had been portrayed as an uphill battle against liberal Democratic Rep. Ed Markey, who boasted a larger war chest and several major party endorsements. A Politico profile compared Lynch's "common-man touch" and moderate views to that of Republican Scott Brown, who won an unlikely Senate bid three years earlier by connecting with independent voters. Lynch lost to Markey in the April 30 Democratic primary.

In September 2016 Lynch announced on WBUR that he'd be voting for the November 2016 ballot question that seeks to expand the number of charter schools in the state.