DNA polymerase theta mediates an end joining pathway (TMEJ) that repairs chromosome breaks. It requires resection of broken ends to generate long, 3′ single-stranded DNA tails, annealing of complementary sequence segments (microhomologies) in these tails, followed by microhomology-primed synthesis sufficient to resolve broken ends. The means by which microhomologies are identified is thus a critical step in this pathway, but is not understood. Here we show microhomologies are identified by a scanning mechanism initiated from the 3′ terminus and favoring bidirectional progression into flanking DNA, typically to a maximum of 15 nucleotides into each flank. Polymerase theta is frequently insufficiently processive to complete repair of breaks in microhomology-poor, AT-rich regions. Aborted synthesis leads to one or more additional rounds of microhomology search, annealing, and synthesis; this promotes complete repair in part because earlier rounds of synthesis generate microhomologies de novo that are sufficiently long that synthesis is more processive. Aborted rounds of synthesis are evident in characteristic genomic scars as insertions of 3 to 30 bp of sequence that is identical to flanking DNA (“templated” insertions). Templated insertions are present at higher levels in breast cancer genomes from patients with germline BRCA1 / 2 mutations, consistent with an addiction to TMEJ in these cancers. Our work thus describes the mechanism for microhomology identification and shows how it both mitigates limitations implicit in the microhomology requirement and generates distinctive genomic scars associated with pathogenic genome instability.