Faderman was raised by her mother, Mary, and her aunt, Rae. In 1923, the two emigrated from a shtetl in Latvia to the lower east side of Manhattan, hoping to marry well enough to pay for their sisters and brothers to join them in the United States. The plan was unsuccessful; the rest of the family was killed during Hitler's extermination of European Jews, and Mary blamed herself for not sending enough money to rescue them. Her guilt contributed to a serious mental illness that would profoundly affect her daughter.

Mary and Rae, Faderman's mother and aunt, worked in the garment industry for very little money. Lillian was her mother's third pregnancy; her mother aborted the first two pregnancies at her father's request, but insisted on bearing and raising the third. Mary remarried when Lillian was a teenager and died in 1979, continuing to have a profound influence on her daughter’s life.

The family moved to Los Angeles, where with her mother’s encouragement Lillian took acting classes. She began modeling as a teenager, discovered the gay bar scene and met her first girlfriend. Before she graduated from high school, she married a gay man much older than herself, a marriage which lasted less than a year and was mainly done at the insistence of her mother and aunt.

Faderman studied first at The University of California, Berkeley and later at UCLA. She is now a professor of English at California State University, Fresno.

She lives with her partner of thirty years, Phyllis. She has one son, Avrom, who earned a PhD from Stanford University.