The Mexico international striker has failed to impress new manager Louis van Gaal and will look to prove himself at the Santiago Bernabeu, with only personal terms left to confirm.
Los Blancos had considered moving for both Radamel Falcao of Monaco and Manchester City’s Alvaro Negredo but have decided that the Mexican - who has been told that he is free to leave Old Trafford - represents the best option.
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Hernandez is seen as a player who can add an extra goal threat but one who will not compromise the standing of the club’s biggest stars, with Karim Benzema currently first-choice center forward.
The 26-year-old has never been able to nail down a consistent starting role with the Red Devils since his move from Guadalajara in the summer of 2010 and was keen to seek first-team football elsewhere.
He sees Madrid as the ideal opportunity to prove himself, feeling that he was not given sufficient opportunities to impress at Old Trafford.
A season's loan has been agreed between the two clubs, with only personal terms left to finalize before the move is officially announced.