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If you could afford to, would you loan a total stranger $100,000? Of course not. If you could charge the person interest and verify that the person was trustworthy, responsible and would pay back the loan, then you might consider it. Right?  A mortgage company in that sense is no different than you. You're a total stranger and you need to prove that you can and will repay the loan. Your credit report is a part of the proof. It shows whether you have responsibly paid your bills in the past and if so, the lender assumes you'll do the same in the future.  Obtaining your credit history requires paperwork and background checks which usually cost between $50-$100.

Major credit repositories collect information from three areas:

• Public records.  Have financial troubles brought you to court?  Have you ever filed bankruptcy or has there ever been a tax lien on your personal assets?  Answering yes to any of these questions will not necessarily keep you from qualifying for a mortgage, but you may have to write a letter to your lender, explaining the situation.
• Trade lines are status reports on existing accounts, such as a major credit cards or department store credit cards.  Your credit report will show if you are currently behind payments or have been behind in payments in the last one to three years.  You can't change the past, but you can do something about the present.  If you are currently delinquent on a payment, it is better to pay it off before you apply for a mortgage. Delinquencies of 90 days or more will adversely affect your overall credit score.
  
  
  
• Inquiries. When you apply for credit, say with Visa, MasterCard or at a department store, like Sears, before you are approved, the companies make inquiries (just like the mortgage company) about your credit rating. The inquiries are made through credit reporting companies. They keep track of how often you apply for credit and if you are accepted or denied. If your credit report shows that you have applied for a numerous credit cards in the recent past, your lender assumes you are desperate for credit, however lenders are not as concerned with the inquiries as they are your trade lines and public records.

For more information on your credit report see these sites:

Yahoo Credit Report

Equifax  

Experian  

TransUnion