The 21-year-old had also been targeted by Manchester City, but the former Malaga star will link up with Liga giants los Blancos once a medical is successfully completed
The midfielder has been linked with a number of Europe's biggest clubs after starring for los Boquerones in their debut season in the Champions League last term.
Premier League outfit Manchester City were strongly tipped to sign the 21-year-old, with the Etihad club reportedly keen on reuniting the player with coach Manuel Pellegrini after his arrival from Malaga earlier in June.
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It was expected initially that the player would join up with previous manager Manuel Pellegrini at his new club Manchester City.
Potential team-mate Sergio Ramos spoke positively about Isco's pontential arrival earlier this week.
"Isco is a great player and we always aspire to reinforce with the best. It's a joy [to hear rumours of a transfer]," he told Onda Cero.
The former Valencia starlet announced his arrival on a European stage following a successful campaign for Los Boquerones, in which he helped his side reach the Champions League quarter finals.
The 21-year-old scored 12 goals in 47 appearances in all competitions last season.