In this paper a new sensitivity‐based finite element (FE) model updating method using spectral density of strain as metric is introduced, which is applicable for damage detection and structural health monitoring purposes. Derivation of the sensitivity equation is exact without any need for approximation. A set of incompletely measured natural frequencies and damping loss factors of the damaged structure is used to deal with incomplete measurement without implementation of the FE model reduction or data expansion algorithms. The insights provided from the distribution of the spectral strain energy among the elements in the intact model are used for selection of excitation location. The solution to the developed sensitivity equation is achieved by linear least square and imposing unprejudiced side constraints on the design variables. The proposed method is successfully examined on the FE model of a 3D truss and frame structure and is capable of localization and quantification of damage. The method is robust against measurement, natural frequency, and mass modeling error. Copyright © 2016 John Wiley & Sons, Ltd.