The 37-time capped Portuguese international has been told he has no future at Bayern and is available, with a return to the Premier League increasingly likely.
It is understood Palhinha has several options, but Villa are currently viewed as the favourites for his signature.
Villa's preference would reportedly be a loan with an option to buy, similar to the arrangement that took Palhinha to Spurs last season.
Bayern, however, would much rather secure a permanent transfer for the former Fulham star and are assessing whether Villa can put forward a proposal that works for them.
Newcastle United have also held talks over Palhinha as they look to add experience to their midfield. The Magpies are assessing the Portuguese alongside another former Tottenham midfielder, Pierre-Emile Hojbjerg, who has also emerged as an option.
Palhinha has reportedly spoken with Newcastle and is aware of their interest, but Villa are currently considered to be ahead of their Premier League rivals.
Palhinha had appeared to be heading back to Portugal, with former club Sporting, Porto and Benfica all showing interest.
Benfica boss Marco Silva would also welcome the opportunity to work with the midfielder again.
However, the financial demands of a deal have proved problematic for the Portuguese clubs and a move back to his homeland is now looking increasingly difficult.
That has strengthened the possibility of Palhinha remaining in England, where Villa are working to find a way to bring him back to the Premier League on a more permanent basis.
For now, Bayern want a permanent sale, Villa favour a loan with an option and Newcastle remain firmly in the picture - but Villa are leading the race as Palhinha weighs up his next move.
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