Five shots clear at the halfway stage and two in front going into the final round, Saltman got off to a promising start as he picked up two birdies in the opening three holes.
However, costly dropped shots at the fifth and eighth saw him overtaken by Velasco, who went on to card a closing round of 65 to become the first home winner of the event in 11 years.
The Spaniard finished on 18-under par 266, two strokes clear of Saltman, who signed for a final-round 69 in second place.
That smashed the Scot's best Challenge Tour finish – tied 21st in the 2008 Reale Challenge de Espana and the 2009 SWALEC Wales Challenge
"I played very well for three days and if someone had told me at the start of the week I'd finish second I would not have believed it," said the Archerfield Links player.
"I'm pleased for Alvaro, he played great, but this week I proved my golf is good enough to contend and my mental side is also working well."
George Murray, winner of the Scottish Hydro Challenge in Aviemore a fortnight ago, cemented his position in the order of merit by tying for fifth on 12-under after a closing 68. Callum Macaulay (69) and Lloyd Saltman (67) tied for 11th on 10-under after strong finishes.
Meanwhile, Europe's college golfers lost their grip on the Palmer Cup after a narrow 13-11 defeat to the USA at Royal Portrush.
Dean Robertson's side, aiming for a third successive win in the Ryder Cup-style clash, had trailed 9-7 with eight singles ties to play but a 4-4 draw in the final day session gave the US a narrow victory.
The visitors struck an early blow in the top match when Daniel Miernicki powered to a 5 and 3 win over Banchory's James Byrne.
David Chung inched the US closer to glory when he beat Henrik Norlander 4 and 2 but Europe rallied in the middle order with wins for English youngster Patrick Spraggs and Swedish duo, David Lingmerth and Pontus Widegren.
Despite another point from Italy's Andrea Pavan, defeats for Welshman Rhys Enoch and Jesper Kennegard of Sweden sealed Europe's fate.
Singles (Europe names first)
J Byrne lost to D Miernicki 5&3;
H Norlander lost to D Chung 4&2;
D Lingmerth bt J Randolph 2 holes;
P Widegren bt C Nagy 6&5;
P Spraggs bt J Chin 1 hole;
R Enoch lost to S Langley 1 hole;
A Pavan bt T Alexander 2&1;
J Kennegard lost R Henley 4&2