The 20-year-old had been on loan at Granada, but it was announced over the weekend that his spell with the La Liga outfit had come to an end ahead of the expected switch to Benfica.
According to the Manchester Evening News, the Primeira Liga side have a legal responsibility to buy the full-back if he makes a certain number of appearances this season.
The report claims that Benfica also have a separate purchase option if they play the required number of matches, while Man United have a buy-back option and a resale clause.
“Manchester United full-back Alvaro Fernandez has been loaned to Portuguese giants Benfica until the end of the season,” reads the club’s official website.
“Despite not having played a competitive first-team game yet for us, Alvaro has 4 of United’s pre-season games, paving the way for Marc Jurado’s goal in the friendly against Wrexham in San Diego.
“This will be a valuable opportunity for Fernandez to gain senior experience and we wish him the best of luck at Estadio da Luz. “
He played 14 times for Granada before the end of his loan, thirteen of them in the Spanish top flight.
“My time at Granada has been special for as long as we all expected,” Fernandez posted on his official Instagram account after finishing his loan spell with the La Liga side.
“It was a real illusion to set up this club and I will be grateful to the fans and the club in general, but especially to the other people who spend day after day with me, take care of me and help me from day one.
“We sought to make the season more successful, but we shared incredible memories and I will not forget my time at the club as a vital component of my career.
“I wish them luck for the rest of the season. I know this organization and our unwavering fans have the attitude and the fight to stay on their feet this season and achieve the goal. “
Fernandez spent last season on loan at Preston North End, making 42 appearances for the championship team, but has yet to make the first team for Man United.
There is no confirmation of how much Benfica could sign the Spaniard for permanently, however, Record recently reported that the value is expected to be around €7 million (£6 million).