Hambly was born in San Diego, California and grew up in Montclair, California. Her parents, Edward Everett Hambly Sr. and Florence Moraski Hambly, are from a coal-mining town in eastern Pennsylvania. She has an older sister, Mary Ann Sanders, and a younger brother, Edward Everett Hambly Jr. In her early teens, Hambly read and was transfixed by J. R. R. Tolkien's The Lord of the Rings, and affixed images of dragons to her bedroom door. She early-on became interested in costumery, and has been a long-time participant in Society for Creative Anachronism activities. In the mid-1960s, the Hambly family spent a year in Australia.

Hambly has a Masters in Medieval History from the University of California at Riverside, completing her degree in 1975 and spending a year in Bordeaux as part of her studies. Her first novel to be published was Time of the Dark in 1982 by Del Rey. Previous to becoming a writer, Hambly chose occupations that allowed her time to write; all of her novels contain a biography paragraph with a litany of jobs familiar to her readers - high school teacher, model, waitress, technical editor, all-night liquor store clerk, and Shotokan karate instructor. Hambly served as President of the Science Fiction and Fantasy Writers of America from 1994 to 1996. Her works have been nominated for many awards in the fantasy and horror fiction categories, winning a Locus Award for Best Horror Novel Those Who Hunt the Night (1989) (released in the UK as Immortal Blood) and the Lord Ruthven award for fiction for its sequel, Travelling With the Dead (1996).

Hambly was married for some years to fellow science fiction writer George Alec Effinger before his death in 2002. She now lives in Los Angeles. Hambly speaks freely of suffering from seasonal affective disorder, which was undiagnosed for years.