South Staffordshire Council had rejected the Bloor Homes application for homes, off the A449 Stafford Road in Penkridge, but the Planning Inspectorate has overturned the decision.
The planning committee threw out the plans, despite council officials backing them, due to fears services in the village would not be able to cope with the influx of new residents.
There were also concerns about the rate the village has been allowed to grow.
The plans came after about 300 homes were built at the nearby Lyne Hill Industrial Estate.
But inspector Zoe Raygen said the plan would help to address the housing shortfall within the Birmingham Development Plan, and 40 per cent of the homes would be affordable.
She added in the report: “There would be some economic benefits of the scheme which would be in the form of construction jobs, but these would be short term only.
"In the longer term, new households would introduce expenditure into the local economy.
“There would be additional benefits from further council tax income and a new homes bonus. However, no schemes upon which the bonus would be spent have been identified.”
Ms Raygen concluded that the harm from the development would not “significantly and demonstrably” outweigh the significant benefits.
Councillor Isabel Ford, for Penkridge North East and Acton Trussell, said she was "very disappointed" with the outcome.
She added: "The inspector supported a lot of the things that we put forward but they seem to have quite reluctantly allowed it.
"We really feel that the infrastructure for Penkridge is already being used up.
"We've got good transport links but we've really reached our limits now and it is disappointing.
"It will be very upsetting for the people who live there as we thought we'd been very effective at the appeal.
"I think they will be very concerns but quite frankly there's nothing we can do, I don't think we would win at the High Court."