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Intrinsic magnetic noise limits the functionality of all magnetic field sensors and related devices using magnetic films as sensing elements. A novel origin of magnetic noise due to ferromagnetic material's magnetostriction is revealed by implementing a comprehensive multi‐level signal‐noise model and thoroughly validating it experimentally on magnetoelectric composite ΔE‐effect sensors. From electrical measurements and operando magnetic domain visualization, magnetic contributions are shown to dominate the noise floor and limit the overall performance of multi‐domain magnetoelastic sensors. The newly introduced noise contribution is correlated with the nonlinearity of the magnetostrictive properties. The effect on sensor output is particularly pronounced in magnetoelastic and magnetoelectric composite devices, but the results generally apply to all sensor devices incorporating magnetic materials. Therefore, the identified magnetic noise source makes a significant contribution to understanding the limitations of magnetic sensors and provides important guidelines for optimizing future magnetic sensors for low detectivity. [ABSTRACT FROM AUTHOR]