Shaye has been married twice. Her first husband died in 1968. In 1988, she married actor Clayton Landey, with whom she appeared in 2002's Wish You Were Dead. The couple had one child before divorcing in 2003.

In 1975, she made her film debut with a small role in Hester Street, followed by small roles in several movies and television shows. In 1978, she appeared in the Jack Nicholson-directed Western Goin' South. "I got a call saying, 'Mr. Nicholson wants you in Mexico for two weeks for this small role called The Parasol Lady. It was so much fun." She has since appeared in a large number of character roles.

Shaye was born in Detroit, Michigan, the daughter of Dorothy (née Katz), a homemaker, and Max Mendle Shaye, a Painter and supermarket owner. Her brother is film executive Robert Shaye. Her family is Jewish; her mother was born in Russia, and her paternal grandparents were from Romania. Shaye studied acting at the University of Michigan before she moved to New York to appear in Off Broadway productions. In 1977, she moved to Los Angeles to pursue her acting career.

From 1980 to 1996, she has appeared in four films by Director Walter Hill: The Long Riders, Brewster's Millions, Extreme Prejudice and Last Man Standing. In 1984, Shaye played a Teacher in A Nightmare on Elm Street. The film was distributed by New Line Cinema, the company founded by the actress' older brother Robert Shaye. She has admitted the family connection helped her a little. "My brother said, 'Put my sister in your movie!'"

In 1994, she had her breakout comedy role of Mrs. Nuegeboren in the Farrelly Brothers' Dumb and Dumber. The film was released on December 16, 1994. Despite receiving mixed reviews from critics, it was a commercial success and developed a cult following in the years since its release. The Farrellys then subsequently cast her as Woody Harrelson's gruesome landlady in Kingpin. Later, again giving her a role as Cameron Diaz's character's overtanned neighbor Magda in the 1998 hit There's Something About Mary. The Farrellys said, 'We want her to look like an old leather bag,' " recalled Shaye. "It was four hours every time they put on the makeup." The film was a sleeper hit, and was the highest-grossing comedy of 1998 in North America as well as the fourth-highest-grossing film of the year. For her performance, Shaye was nominated for a Blockbuster Entertainment Award for Favorite Supporting Actress – Comedy. She followed this with 1999's Detroit Rock City as an uptight mother waging a personal war against the band Kiss.

In 2003, Shaye appeared alongside Cuba Gooding Jr. and Horatio Sanz in Boat Trip as Sonya, a horny tanning coach who begins stalking Sanz's character. That same year she co-starred with Ray Wise and Alexandra Holden in the cult horror film Dead End as Laura Harrington, and as Jenny Buono, the mother of 1970s Los Angeles serial killer Angelo Buono in The Hillside Strangler. For her role in Dead End, Shaye received positive reviews and was nominated for a Fangoria Chainsaw Award for Best Supporting Actress.

In 2005, Shaye appeared in the film 2001 Maniacs as Granny Boone and again in the sequel 2001 Maniacs: Field of Screams. The next year she had a supporting role in the thriller Snakes on a Plane, playing Grace, the senior FLIGHT attendant who acts as the flight's purser. In 2007, she appeared in the short films Sponsored By, Under The Gun, Midnight Snack, Time Upon a Once, Old Home Boyz, Backseat Driving Test, and The Yes Men which were directed by contestants on the reality show On the Lot.

In 2011, Shaye played medium Elise, a supporting role, in the horror film Insidious. "It scared the daylights out of me," said Shaye. "I read it in bed, and when I finished, I took it downstairs and locked it in the closet. I really was chilled to the bone by the story." The film was released on April 1, 2011, and received positive reviews. It grossed a total of $97,009,150 worldwide. It was the most profitable film of 2011. Shaye received positive reviews and was nominated for a Fangoria Chainsaw Award for Best Supporting Actress, a Fright Meter Award for Best Supporting Actress, and a Saturn Award for Best Supporting Actress.

On November 19, 2012, it was officially announced that Shaye, Patrick Wilson, and Rose Byrne would reprise their roles from the first film. The film was released September 13, 2013. It received mixed reviews and was a box office success.