T-Mobile and Sprint are entering due diligence in a stock-for-stock deal that is expected to make Deutsche Telekom the controlling owner, sources tell CNBC's David Faber.

The exchange ratio for the stocks is expected to be at market, the sources said. The companies are hoping to reach an agreement by the third week of October. Faber said a deal "seems likely" at this point, and the two companies would be able to wring significant costs out of a combined operation.

But a merger of the nation's third- and fourth-largest mobile phone carriers would raise questions about whether regulators would allow the combination or block it on antitrust grounds.

Shares of T-Mobile were 1.6 percent lower on Monday to about $63.04, but are still up about 10 percent this year. Shares of Sprint fell more than 6 percent Monday and are now down more than 5 percent for the year, at $7.97. T-Mobile is the bigger company in terms of market value, at $53 billion versus $32 billion, according to FactSet.

T-Mobile is owned by Deutsche Telekom while Sprint is controlled by SoftBank, which had also explored a possible combination of Sprint with Charter Communications. That latter transaction was put on hold given the T-Mobile-Sprint talks.

Minority owners would own about mid-30 percent of the combined company, sources said.

The two sides have had on-again, off-again talks. While T-Mobile's CEO John Legere seems likely to lead a combined company, SoftBank's Masayoshi Son is expected to want a say in how the company is run.