Virtual reality (VR) is a potentially powerful technology for enhancing assessment in mental health. At any time or place, individuals can be transported into immersive and interactive virtual worlds that are fully controlled by the researcher or clinician. This capability is central to recent interest in how VR might be harnessed in both treatment and assessment of mental health conditions. The current review provides a summary of the advantages of using VR for assessment in mental health, focusing on increasing ecological validity of highly controlled environments, enhancing personalization and engagement, and capturing real-time, automated data in real-world contexts. Considerations for the implementation of VR in research and clinical settings are discussed, including current issues with cost and access, developing evidence base, technical challenges, and ethical implications. The opportunities and challenges of VR are important to understand as researchers and clinicians look to harness this technology to improve mental health outcomes.