Prolyl-4-hydroxylase is an important nonheme iron-containing dioxygenase in humans involved in the regioselective hydroxylation of a proline residue in a peptide chain on the C-4 position. In biosystems this process is important to create collagen cross-linking and cellular responses to hypoxia. We have performed a series of density functional theory (DFT) studies into the origin of the regioselectivity of proline hydroxylation by P4H enzymes using a minimal active site model (where substrate is unhindered in the binding site) and a larger active site model that incorporates steric hindrance of the substrate by several secondary sphere aromatic residues. Our studies show that thermodynamically the most favorable hydrogen atom abstraction position of proline is from the C-5 position; hence, the small model gives a low reaction barrier and large exothermicity for this process. However, stereochemical repulsions of the substrate with aromatic residues of Tyr(140) and Trp(243) in the second coordination sphere prevent C-5 hydroxylation and make C-4 hydroxylation the dominant mechanism, despite a lesser driving force for the reaction. These studies explain the remarkable regioselectivity of proline hydroxylation by P4H enzymes and show that the regioselectivity is kinetically controlled but not thermodynamically. In addition, we calculated spectroscopic parameters and found good agreement with experimental data.