The construction of the Mahabuddha Temple, located in a claustrophobically narrow courtyard, was begun in 1585 during the reign of King Mahendra Malla by a Newari Brahman called Abhayaraja Shakya. Abhayaraja had spent three years on a pilgrimage to Bodh Gaya in India, the place where Buddha is said to have attained enlightenment. On his return, Abhayaraja brought with him a Buddha statue for which he endeavoured to build a temple similar to the famous Mahabodhi Temple in Bodh Gaya. Well-prepared for the task, Abhayaraja carried with him a model of the original temple in India, which was to be copied in Patan.

Though built on a much smaller scale than the original, the construction of the Mahabuddha Temple in Patan reputedly took several generations. After Abhayaraja Shakya had died, his sons and their descendents carried on the work. Records also seem to indicate that the temple turned out somewhat different from the original in India, which may have been due to the difficulties in working from a small-scale model such as Abhayaraja must have brought from India.

During the earthquake of 1934 the temple was severely damaged and, due to lack of photographs or drawings, the restoration had to be done entirely from memory. The outcome was bound to be different from the original structure.