The review presents a broad overview of the biomedical applications of surface functionalized iron oxide nanoparticles (IONPs) as magnetic resonance imaging (MRI) agents for sensitive and precise diagnosis tool and synergistic combination with other imaging modalities. Then, the recent progress in therapeutic applications, such as hyperthermia is discussed and the available toxicity data of magnetic nanoparticles concerning in vitro and in vivo biomedical applications are addressed. This review also presents the available computer models using molecular dynamics (MD), Monte Carlo (MC) and density functional theory (DFT), as a basis for a complete understanding of the behaviour and morphology of functionalized IONPs, for improving NPs surface design and expanding the potential applications in nanomedicine.