Urbanization in Ethiopia is growing at a fast rate and the same phenomenon is observed in the Amhara region. Despite the efforts made to enhance urban expansion by the government issues related to the land rights and livelihood of farmers losing their land due to urban expansion are over looked. This research therefore examines the effect of urbanization on land rights and livelihood of peri-urban farmers in Dil-Yibza town. To address the objective of the study used mixed research method and data was collected by using instruments such as questionnaires, conducting key informant interviews, focus group discussions (FGDs) and field observation. Landsat image of the three consecutive periodic years was used to examine the trends in land use land cover change (LULC) of the town. The data were subject to both descriptive and inferential techniques of data analysis. The result revealed that if the current level of urban expansion continues about 166.48 ha of farming land will be converted into the urban built-up area and a minimum of 432 peri-urban farmers of Dil-Yibza town will be displaced in the coming ten years. Urban expansion has significantly affected peri-urban farmers' land use right. Generally, the results signaled that there was limited or no legal and institutional support for expropriated farmers in the study area. Whereas the rapid conversion of agricultural land to urban setting was considered as a success observing the land rights of farm households during expropriation and the absence of legal and institutional support to produce sustainable livelihoods for peri-urban farmers has remained unanswered challenge. Hence, it is recommended that displaced farmers in Dil Yibza town should be supported by responsible bodies to formulate business plans and provide them with technical support to make their economic activities profitable and sustainable.