Abstract Introduction The use of unimproved energy sources is associated with a range of health problems. However, in Ethiopia, studies focused on the utilization of unimproved energy sources and associated factors are limited. Therefore, this study aimed to close this gap. Methods In this community-based cross-sectional study, 5,350 participants were enrolled. Multivariable logistic regression analyses were employed to examine the associations between the utilization of unimproved energy sources and the predictor variables. Additionally, the chi-square test was used to examine the association between households' unimproved energy source utilization and the occurrence of health problems. Results In this study, 45% of households used unimproved energy sources. In the multivariable analysis, households headed by men (adjusted odds ratio [AOR] = 0.76; with 95% confidence interval [CI] 0.66, 0.87), households headed by illiterate heads (AOR = 1.77 with 95% CI 1.47, 2.14), household family size (AOR = 0.79 with 95% CI 0.79, 0.93), households headed with farmers (AOR = 3.33 with 95% CI 2.31, 4.81), households with low income (AOR = 3.41 with 95% CI 2.57, 4.51), rural households (AOR = 7.94 with 95% CI 6.76, 9.32), and households with regular coffee ceremony practices (AOR = 1.17 with 95% CI 1.00, 1.36) were significantly associated with the utilization of unimproved energy sources. Additionally, the results of the chi-square test revealed that households that relied on unimproved energy sources had a 1.5-fold greater risk of developing respiratory illnesses, an 8.5-fold greater risk of developing cataract disease, and a 5.2-fold greater risk of developing trachoma than households that used improved energy sources. Conclusion A significant proportion of households in Bishoftu town still rely on unimproved energy sources for cooking and other household needs. This indicates a substantial challenge in achieving universal access to clean and sustainable energy in the area. Several socioeconomic and demographic factors are associated with the use of unimproved energy sources, including male-headed households, illiteracy of household head, smaller family size, farming occupation, low income, rural residence, and regular coffee ceremony practices. Most importantly, the use of unimproved energy sources is associated with higher risks of respiratory illnesses, cataracts, and trachoma among household members. Therefore, the government should implement targeted interventions to promote the adoption of clean and improved energy sources among vulnerable households such as households headed by farmers, those with illiterate heads, households with low socioeconomic status, households with regular coffee ceremony practices, and those in rural areas. In addition, the local government should develop and implement educational campaigns to raise awareness about the health and environmental risks associated with the use of unimproved energy sources, particularly among households with high-risk factors identified in the study.