Permalloy, despite being a widely utilized soft magnetic material, still calls for optimization in terms of magnetic softness and magnetostriction for its use in magnetoresistive sensor applications. Conventional annealing methods are often insufficient to locally achieve the desired properties for a narrow parameter range. In this study, we report a significant improvement of the magnetic softness and magnetostriction in a 30 nm Permalloy film after He$^+$ irradiation. Compared to the as-deposited state, the irradiation treatment reduces the induced anisotropy by a factor ten and the hard axis coercivity by a factor five. In addition, the effective magnetostriction of the film is significantly reduced by a factor ten - below $1\times10^{-7}$ - after irradiation. All the above mentioned effects can be attributed to the isotropic crystallite growth of the Ni-Fe alloy and to the intermixing at the magnetic layer interfaces under light ion irradiation. We support our findings with X-ray diffraction analysis of the textured Ni$_{81}$Fe$_{19}$ alloy. Importantly, the sizable magnetoresistance is preserved after the irradiation. Our results show that compared to traditional annealing methods, the use of He$^+$ irradiation leads to significant improvements in the magnetic softness and reduces strain cross sensitivity in Permalloy films required for 3D positioning and compass applications. These improvements, in combination with the local nature of the irradiation process make our finding valuable for the optimization of monolithic integrated sensors, where classic annealing methods cannot be applied due to complex interplay within the components in the device.