The Santiago Bernabeu side has confirmed the capture of the Spain Under-21 international from Real Sociedad, with the midfielder penning a six-year deal.
Both clubs had been in talks over a transfer for a number of weeks, with Sociedad's insistence that Madrid meet the 23-year-old's 30 million euro buyout clause initially holding up the deal.
Los Blancos have confirmed on their official website that the deal has been brokered, and Illarramendi will sign a six-year deal with the Santiago Bernabeu side upon completion of his medical on Saturday.
Illarramendi is a product of the Sociedad youth academy and had developed into a key player at the Basque side since making his official first-team debut in June 2010. The midfielder was an integral part of the Spain Under-21 squad that was crowned European champion in Israel this summer.
Illarramendi becomes Real Madrid's fourth signing of the summer transfer window after the previous captures of Casemiro, Isco and Daniel Carvajal.