The 21-year-old spent the 2016-17 campaign on loan at Eintracht Frankfurt before returning to Madrid last summer, and he made 12 appearances for the European champions last term.
Vallejo is currently training with Los Blancos ahead of the new season, and the centre-back cannot wait to get started under the leadership of new head coach Julen Lopetegui.
"It's exciting to be nearing another new campaign," Vallejo told the club's official website. "We are now preparing ourselves both physically and mentally, the first training sessions are very important because they help get us off to the right path of winning titles.
"Everybody is happy at the moment and we are all in good spirits and the training facilities as always are fantastic.
"I want to keep playing more of course but I am very happy with how I have played when selected and last season was special with winning the Champions League."
Vallejo, who trained with the Spain squad ahead of the 2018 World Cup, joined Madrid from Real Zaragoza in 2015.