Urbanization and urban growth are considered as a modern way of life which manifests economic growth and development in many countries. On the other hand, it yields a number of evils, especially unplanned (squatter) settlement. The study conducted on the area of squatter settlement in Jimma town is aimed to explore the socioeconomic factors contributing for squatter settlement and its effect on social, economic and institutional conditions of settler and development of the town. The study was guided by qualitative research approach and employed cross-sectional and phenomenological design in which primary data required for the analysis was collected through key informant interview, focus group discussion, non-participant observation as well as secondary data from document and analyzed by thematic analysis. The findings of this study revealed that, the root cause identified for squatter settlement is shortage of residential house and its consequential high price of house rent, the need of holding large plot of land and inefficient land administration system. Other findings indicated that squatter settlement incur costs on both the government and the squatter. Squatter settlement creates fear and dearth of confidence on the land they hold illegally, poor infrastructure due to lack of government interventions and low social service delivery, and social distress within the community. The study also found out that squatting displaces the host ex-farmers from their farmland and leads to consequent poverty and livelihood disasters. It is recommended that, political will in accessing residential land and financial commitment of the government is required. Active participation of the public and abiding legal procedures in accessing residential land is vital.