Granular materials subjected to fluid flow may experience fracture formation and fluid flow localization. Current explanations for hydraulic fracture in soils fail to satisfy the inherent characteristics of granular materials: effective stress-dependent cohesionless-frictional strength. We apply complementary experimental and numerical techniques to identify the underlying particle-scale mechanisms. First, we show that the miscibility of the invading fluid with the host fluid leads to distinct localization processes that depend on the balance between particle-level skeletal forces (effective stress-dependent), capillary forces (the invasion of the interfacial membrane when immiscible fluids are involved), and seepage drag forces (associated with fluid flow velocity). Then, we identify the positive feedback mechanisms at surface defects and fracture tips that promote fracture initiation and sustain fracture propagation. These include increased porosity at the tip due to strains preferentially normal to the fracture alignment, either eased membrane invasion (immiscible fluids) or higher hydraulic conductivity (miscible fluids), and the emergence of particle-level forces that promote opening-mode particle displacement. This effective stress compatible sequence of events helps identify the parameters that govern fluid-driven fracture formation in uncemented sediments, and explain experimental observations.