In the present work, the microstructural damage behavior of two DP1000 steel test subjects through various stress states was studied to thoroughly learn the interaction between microstructure, damage evolution, and edge stretchability. In addition, microstructural changes at the fracture sites and fracture surfaces were observed using a scanning electron microscope. The distinctive mechanical and damage behaviors of the materials were revealed. However, the steels were slightly different in chemical composition, microstructural characteristics, and yield stress. The results showed that when microstructural and mechanical properties of phases were more similar, i.e., the microstructure was more homogenous, the damage was initiated by cracking at ferrite-martensite interfaces, and it propagated along the loading direction. This allowed the material to represent high local formability and significant necking. In contrast, by increasing the dissimilarity between ferrite and martensite phases, damage propagated by the shear linking of the voids hindered local deformation of the material and led it to sudden fracture after negligible necking. These distinct damage evolutions noticeably influenced the materials’ edge stretchability. Since higher local formability favors the edges with higher resistance to cracking, the hole expansion ratio increases, as clearly observed throughout the current study.