The Domesday Book of 1086 records the village as Grennedone. The toponym is derived from the Old English for 'green hill near a wood', though the 'Underwood' part of the name was only added in the medieval period to differentiate the village from nearby Long Crendon and to signify the village's position close to the Bernwood Forest. The manor of Grennedone, called Grendone Manor, was owned by Henry de Feireres and anciently belonged to the St Amand family. Almeric de St Amand of this family was one of the godfathers of King Edward I, who was baptised in 1239.

The village has developed from east to west, terminating at St Leonards church – built in 1223 at the western most end of the village. St Leonard’s church has an ancient structure composed on a nave channel and west tower. Towards the northeast in the grounds of the churchyard, Rectory House is located. In 1851 a Baptist Chapel was also built, approximately 2 miles from St Leonards Church near the A41 crossroads.

Early dwellings were composed of mud walls, roofed with thatch, which were equally built on either side of the road. Today, there remain a number of picturesque thatched cottages in the village, built chiefly of timber with brick in-fillings; they date from the early part of the 17th century.

In 1642, Grendon Underwood lay on the forest tracks used by gypsies and strolling players (travelling performers) and during the 16th century a large farm building was built in the centre of the village, near to an ancient three-storey house, principally made of timber constructed with red brick, which was formerly known as the Ship Inn public house. It is thought that during the 17th century this public house was visited more than once by Shakespeare as a half way point on his journey between Stratford – Upon –Avon and London and. Now known as Shakespeare House, it is a Grade II listed former Elizabethan coaching inn and private residence.

Built in 1906, Grendon Underwood Junction was the point at Greatmoor, just east of Grendon Underwood village, at which the Alternative Route of the London Extension of the Great Central Railway left the original main line. This was a little north of the former Quainton Road railway station. The lines were closed to passenger trains in 1966 but subsequently used by freight trains and soon to be re-instated as part of the East West Rail project between Oxford and Cambridge.

Roald Dahl’s mother Sophie had a cottage in Grendon Underwood. During WWII Sophie and her daughters moved here to escape the German bombings in London and eastern England. When Roald returned home from duty in the Royal Air Force in 1941 he at first had no idea where to find his family. Their eventual reunion is described by Dahl on the last page of his autobiography Going Solo.

Post 1945 development has kept a linear form along Main Street, the only thoroughfare through the village, with houses equally dispersed on either side of the road. The village continues to grow steadily and sustainably with development mainly consisting of infilling, particularly towards the west of the village - the largest post-war housing development being the construction of seventeen dwellings at Rumptons Paddock, opposite St Leonards church during the 1970s, followed by dwellings on Springhill Road, the old Grendon Garage site, off Shakespeare Orchard & at Lawn Farm.

In 1962, HM Prison Grendon opened in the parish, initially as a psychiatric prison for prisoners with antisocial personality disorder. However, the establishment has slowly evolved into a mainstream prison. It is currently the only therapeutic prison for treatment of serious sex offenders and violent offenders. The main administration centre is in the historic Grendon Hall which, during the Second World War Grendon Hall was Station 53a of the Special Operations Executive (SOE).