Greenwood was born in Hanky Park, in Pendleton, Salford, Lancashire, the son of radical working class parents. His father died when he was nine, and his mother supported him by working as a waitress. Like many children he left school at the age of 13 to work (as a pawnbroker's clerk). He took a succession of low paid jobs, and continued to educate himself in Salford Public Library. During periods of unemployment he worked for the local Labour Party and began to write short stories.
While unemployed, he wrote his first novel, Love on the Dole, in 1932. It was about the destructive social effects of poverty in his home town. After several rejections, it was published in 1933. It was a critical and commercial success, and a huge influence on the British public's view of unemployment. It even prompted parliament to investigate, leading to reforms. The popularity of the novel, which was adapted as a play that had successful runs in both Britain and the United States, meant Greenwood would not have to worry about employment again.
The script for the 1935 Sydney Howard comedy, Where’s George? was written by Greenwood although it had none of the social commentary of his other work.
Greenwood was engaged to a local Salford girl Alice and stayed in Salford for a while, where he served on the city council, but soon moved to London. He abandoned his fiancée who sued him successfully for breach of promise. In 1937 he married Pearl Alice Osgood, an American actress and dancer.
During the Second World War Greenwood produced films through Greenpark Productions Ltd for the British government, and served in the Royal Army Service Corps. 1944 saw the publication of Something in my Heart, and the end of his marriage to Pearl.
After the war he wrote the Trelooe trilogy – So Brief the Spring (1952), What Everybody Wants (1954) and Down by the Sea (1956) – and a few plays: Cure for Love (1945, filmed 1950), Date of West End opening "12 July 1945" Too Clever for Love (1952) and Saturday Night at the Crown (1958). He also co-wrote the film Chance of a Lifetime in 1950, in a similar factory setting to Love on the Dole. In 1951 his book Lancashire in the County Books Series was published by Robert Hale. It has only five chapters of which the first four are short and the fifth (pp. 42-298) contains descriptions of the larger towns and a selection of other places. He retired to Douglas, Isle of Man in the 1950s, and wrote an autobiography There Was a Time (1967) which became a play Hanky Park (1968).
His manuscripts and letters are archived in the University of Salford's Walter Greenwood Collection.
He died in Douglas, Isle of Man on 13 September 1974 aged 70.