Saframycin A (SFM-A) is a potent antitumor antibiotic that belongs to the tetrahydroisoquinoline family. Biosynthetic studies have revealed that its unique pentacyclic core structure is derived from alanine, glycine, and non-proteinogenic amino acid 3-hydroxy-5-methyl-O-methyltyrosine (3-OH-5-Me-OMe-Tyr). SfmD, a hypothetical protein in the biosynthetic pathway of SFM-A, was hypothesized to be responsible for the generation of the 3-hydroxy group of 3-OH-5-Me-OMe-Tyr based on previously heterologous expression results. We now report the in vitro characterization of SfmD as a novel heme-containing peroxidase that catalyzes the hydroxylation of 3-methyltyrosine to 3-hydroxy-5-methyltyrosine using hydrogen peroxide as the oxidant. In addition, we elucidated the biosynthetic pathway of 3-OH-5-Me-OMe-Tyr by kinetic studies of SfmD in combination with biochemical assays of SfmM2, a methyltransferase within the same pathway. Furthermore, SacD, a counterpart of SfmD involved in safracin B biosynthesis, was also characterized as a heme-containing peroxidase, suggesting that SfmD-like heme-containing peroxidases may be commonly involved in the biosynthesis of SFM-A and its analogs. Finally, we found that the conserved motif HXXXC is crucial for heme binding using comparative UV-Vis and Magnetic Circular Dichroism (MCD) spectra studies of SfmD wild-type and mutants. Together, these findings expand the category of heme-containing peroxidases and set the stage for further mechanistic studies. In addition, this study has critical implications for delineating the biosynthetic pathway of other related tetrahydroisoquinoline family members.