Underwood was born in Glendale, California. He was an AFS exchange student living in Ceylon which was renamed Sri Lanka. After graduating from high school he briefly attended Occidental College as a pre-med student, but transferred to the USC School of Cinema (now USC School of Cinematic Arts) after deciding to become a filmmaker. Underwood majored in cinema with a minor in anthropology.
Following his critically acclaimed venture into television, Underwood decided to have a go at directing feature films. His first effort was Tremors starring Kevin Bacon, Fred Ward and Reba McEntire in her acting debut. Written by his friends Brent Maddock & S. S. Wilson, it was released by Universal Studios in 1990. The film was well received by the critics and later established itself as a cult classic.
Underwood received his first taste of commercial success with 1991's City Slickers, which starred Billy Crystal, Daniel Stern and Jack Palance, who won an Academy Award for his performance. The film made $179m worldwide with a budget of only $27m. It was the tenth most successful film released in 1991 (the fifth most successful in the US). His next film, Heart and Souls (1993), was again well-received by critics but struggled at the box office (making a total of $16m in the US). It starred Robert Downey, Jr., Charles Grodin, Tom Sizemore, Kyra Sedgwick, Elisabeth Shue and Alfre Woodard. He followed this with Speechless (1994), with Michael Keaton and Geena Davis.