The two clubs are working to finalise a deal for the 2020/21 campaign that is again not expected to include an option for Arsenal to buy the 24 year-old permanently.
Midfielder Ceballos has already agreed to move back to the Emirates following talks with manager Mikel Arteta.
Ceballos spent last season at the Emirates, making 37 appearances in all competitions, scoring twice and finished the season strongly for FA Cup winners.
That, along with the desire of Madrid chiefs to run the rule their loaned out players including Ceballos in their bid to freshen up Zinedine Zidane’s squad, initially hit Arsenal’s hopes of re-signing the Spain international. Ceballos trained with the Spanish champions on Monday.
Knowing Zidane did not consider him part of his plans further increased Ceballos desire to push for a return to Arsenal.