According to an article by David Quammen in the January, 2012 issue of National Geographic:

The earnest saga of farming and ranching in northern Montana began with a misconception that verged on a lie: free land, enough to feed your family! But the land wasn't quite free, and it was far from enough.

On  January 1, 1863, Daniel Freeman, a Union Army scout, was scheduled to leave Gage  County, Nebraska Territory, to report for duty in St. Louis. At a New Year's  Eve party the night before, Freeman met some local Land Office officials and  convinced a clerk to open the office shortly after midnight in order to file  a land claim. In doing so, Freeman became one of the first to take advantage  of the opportunities provided by the Homestead Act, a law signed by President  Abraham Lincoln on May 20, 1862. At the time of the signing, 11 states had left  the Union, and this piece of legislation would continue to have regional and  political overtones.

The distribution of Government lands had been an issue since the Revolutionary  War. At the time of the Articles of Confederation, the major controversy related  to land measurement and pricing. Early methods for allocating unsettled land  outside the original 13 colonies were arbitrary and chaotic. Boundaries were  established by stepping off plots from geographical landmarks. As a result, overlapping  claims and border disputes were common. The Land Ordinance of 1785 finally implemented  a standardized system of Federal land surveys that eased boundary conflicts.  Using astronomical starting points, territory was divided into a 6-mile square  called a township prior to settlement. The township was divided into 36 sections,  each measuring 1 square mile or 640 acres each. Sale of public land was viewed  as a means to generate revenue for the Government rather than as a way to encourage  settlement. Initially, an individual was required to purchase a full section  of land at the cost of $1 per acre for 640 acres. The investment needed to purchase  these large plots and the massive amount of physical labor required to clear  the land for agriculture were often insurmountable obstacles

By 1800, the minimum lot was halved to 320 acres, and settlers were allowed  to pay in 4 installments, but prices remained fixed at $1.25 an acre until 1854.  That year, federal legislation was enacted establishing a graduated scale that  adjusted land prices to reflect the desirability of the lot. Lots that had been  on the market for 30 years, for example, were reduced to 12 ½ cents per  acre. Soon after, extraordinary bonuses were extended to veterans and those interested  in settling the Oregon Territory, making homesteading a viable option for some.  But basically, national public-land-use policy made land ownership financially  unattainable for most would-be homesteaders.

Before and after the Mexican-American war in the mid 1800s, popular pressure  to change policy arose from the evolving economy, new demographics, and shifting  social climate of early 19th-century America. In the 1830s and 1840s, rising  prices for corn, wheat, and cotton enabled large, well-financed farms, particularly  the plantations of the South, to force out smaller ventures. Displaced farmers  then looked westward to unforested country that offered more affordable development.  Prior to the war with Mexico (1846–48), people settling in the West demanded  “preemption,” an individual's right to settle land first and pay  later (essentially an early form of credit). Eastern economic interests opposed  this policy as it was feared that the cheap labor base for the factories would  be drained. After the war with Mexico, a number of developments supported the  growth of the homestead movement. Economic prosperity drew unprecedented numbers  of immigrants to America, many of whom also looked westward for a new life. New  canals and roadways reduced western dependence on the harbor in New Orleans,  and England's repeal of its corn laws opened new markets to American agriculture.

Despite these developments, legislative efforts to improve homesteading laws  faced opposition on multiple fronts. As mentioned above, Northern factories owners  feared a mass departure of their cheap labor force and Southern states worried  that rapid settlement of western territories would give rise to new states populated  by small farmers opposed to slavery. Preemption became national policy in spite  of these sectional concerns, but supporting legislation was stymied. Three times—in  1852, 1854, and 1859—the House of Representatives passed homestead legislation,  but on each occasion, the Senate defeated the measure. In 1860, a homestead bill  providing Federal land grants to western settlers was passed by Congress only  to be vetoed by President Buchanan.

With the secession of Southern states from the Union and therefore removal  of the slavery issue, finally, in 1862, the Homestead Act was passed and signed  into law. The new law established a three-fold homestead acquisition process:  filing an application, improving the land, and filing for deed of title. Any  U.S. citizen, or intended citizen, who had never borne arms against the U.S.  Government could file an application and lay claim to 160 acres of surveyed Government  land. For the next 5 years, the homesteader had to live on the land and improve  it by building a 12-by-14 dwelling and growing crops. After 5 years, the homesteader  could file for his patent (or deed of title) by submitting proof of residency  and the required improvements to a local land office.

Local land offices forwarded the paperwork to the General Land Office in Washington,  DC, along with a final certificate of eligibility. The case file was examined,  and valid claims were granted patent to the land free and clear, except for a  small registration fee. Title could also be acquired after a 6-month residency  and trivial improvements, provided the claimant paid the government $1.25 per  acre. After the Civil War, Union soldiers could deduct the time they served from  the residency requirements.

Some land speculators took advantage of a legislative loophole caused when  those drafting the law's language failed to specify whether the 12-by-14 dwelling  was to be built in feet or inches. Others hired phony claimants or bought abandoned  land. The General Land Office was underfunded and unable to hire a sufficient  number investigators for its widely scattered local offices. As a result, overworked  and underpaid investigators were often susceptible to bribery.

Physical conditions on the frontier presented even greater challenges. Wind,  blizzards, and plagues of insects threatened crops. Open plains meant few trees  for building, forcing many to build homes out of sod. Limited fuel and water  supplies could turn simple cooking and heating chores into difficult trials.  Ironically, even the smaller size of sections took its own toll. While 160 acres  may have been sufficient for an eastern farmer, it was simply not enough to sustain  agriculture on the dry plains, and scarce natural vegetation made raising livestock  on the prairie difficult. As a result, in many areas, the original homesteader  did not stay on the land long enough to fulfill the claim.

Homesteaders who persevered were rewarded with opportunities as rapid changes  in transportation eased some of the hardships. Six months after the Homestead  Act was passed, the Railroad Act was signed, and by May 1869, a transcontinental  railroad stretched across the frontier. The new railroads provided easy transportation  for homesteaders, and new immigrants were lured westward by railroad companies  eager to sell off excess land at inflated prices. The new rail lines provided  ready access to manufactured goods and catalog houses like Montgomery Ward offered  farm tools, barbed wire, linens, weapons, and even houses delivered via the rails.

On January 1, 1863, Daniel Freeman and 417 others filed claims. Many more  pioneers followed, populating the land, building towns and schools and creating  new states from the territories. In many cases, the schools became the focal  point for community life, serving as churches, polling places and social gathering  locations. In 1936, the Department of the Interior recognized Freeman as the  first claimant and established the Homestead National Monument, near a school  built in 1872, on his homestead near Beatrice, Nebraska. Today, the monument  is administered by the National Park Service, and the site commemorates the changes  to the land and the nation brought about by the Homestead Act of 1862. By 1934, over 1.6 million homestead applications were processed and more than 270 million acres—10 percent of all U.S. lands—passed  into the hands of individuals. The passage of the Federal Land Policy and Management Act of 1976 repealed the Homestead Act in the 48 contiguous states, but it did grant a ten-year extension on claims in Alaska.