Background: The COVID-19 pandemic is the global public health emergency concern and had an impact on the day to day life of individuals. Its effect on an individual’s mental health is significant to the extent of suicide. Objective: This study aimed to assess the magnitude of psychological problems and their associated factor among communities living in Dilla town in response to the pandemic. Methods: From Apr 1- Apr 15, 2020, a community-based cross-sectional study was conducted using multi-stage sampling techniques. Self-administered the questioner, Depression, Anxiety and Stress Scale (DASS-21), and logistic regression analysis (95% CI, p-value <0.05) was used. Results: This study included 445 respondents with a 94% non- response rate who was living in Dilla town. In total, 34.4% of respondents had a psychological problem (11.4 % mild and 23% moderate level of the psychological problem). Female, Greater secondary level of education, monthly income below 500 ETB, more than three family size, and wearing face mask were variables associated with the outcome variable (p < 0.05). Conclusions: Nearly one-third of the respondents had mild to moderate psychological among communities living in Dilla town. There is a need for mental health support on those identified groups of peoples to enhance their resilience in response to the pandemic.