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Greenwood was born in Hanky Park, Salford in 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 later adapted as a play that had successful runs in both England and the United States, meant Greenwood would not have to worry about employment again. He stayed in Salford for a while, and served on the council, but soon moved to London. In 1937 he married Pearl Alice Osgood, an American actress and dancer.

Although he never matched the success of Love on the Dole, he produced a succession of novels during the 1930s: His Worship the Major (1934), The Time is Ripe (1935), Standing Room Only, or 'A Laugh in Every Line' (1936), Cleft Stick (1937), Only Mugs Work (1938), The Secret Kingdom (1938) and How the Other Man Lives (1939). He also cowrote a George Formby film, No Limit (1935).

While living in Polperro, Cornwall, in 1939 Greenwood set up a production company, Greenpark Productions Ltd, which is still trading as a film archive.

During the Second World War Greenwood produced films through Greenpark Productions Ltd for the British government, and served in the Royal Army Service Corp. 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 "Jul. 12, 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. 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.