The 21-year-old will feature for the Dons in their pre-season friendly against Plymouth on Sunday.
He will then put pen to paper on a one-year contract, with a further one-year option, with the League One club next week.
Hodson started his career as a trainee with the Hornets and made his first-team debut in May 2009.
He has since totalled 91 appearances for the club and scored one goal, but has now been deemed surplus to requirements by boss Gianfranco Zola, who loaned him out to Brentford last season.
A statement on Watford's official website read: "The club would like to place on record its thank to Lee for his contribution at Vicarage Road and wish him all the very best for the future."