We study the phase transition in Cu-substituted iron-based superconductors with a new developed real-space Green's function method. We find that Cu substitution has strong effect on the orbital-selective Mott transition introduced by the Hund's rule coupling. The redistribution of the orbital occupancy which is caused by the increase of the Hund's rule coupling, gives rise to the Mott–Hubbard metal-insulator transition in the half-filled d xy orbital. We also find that more and more electronic states appear inside that Mott gap of the d xy orbital with the increase of Cu substitution, and the in-gap states around the Fermi level are strongly localized at some specific lattice sites. Further, a distinctive phase diagram, obtained for the Cu-substituted Fe-based superconductors, displays an orbital-selective insulating phase, as a result of the cooperative effect of the Hund's rule coupling and the impurity-induced disorder.