The 26-year-old arrives at the newly-relegated Black Cats for an undisclosed fee, becoming the club's sixth signing of the summer under new boss Simon Grayson.
Steele, who will now compete for the number one spot at the Stadium of Light following the departure of Jordan Pickford, made more than 100 appearances during a three-year stay at Blackburn.
"I'm absolutely over the moon. It's a dream come true to sign for such a massive club. My family are pretty much split between the three North-East clubs, so I spent my childhood watching them all and I remember coming to the Stadium of Light with my uncle and cousin," he told the club's official website.
"I've got a lot of experience and played a lot of games – most of which are in the same league – and that's probably one of the reasons why the gaffer has signed me. Hopefully I can help the team and I'm sure we'll have a good season. I want just want to work hard, try my best and help the team push on."
Steele began his career at Sunderland's North-East rivals Middlesbrough.