This is an answer I provided to a similar question some time ago. Let me know if you have questions:

For decades, folklorists followed the lead of the European folk to make a distinction between folktales, elaborate stories told as fiction, and legends, narratives told to be believed. More recently, the celebrated Swedish-Irish folklorist, Bo Almqvist (1931-2013) suggested that the definition of a legend should be that it is a story usually told to be believed, and this points to an issue in folklore studies and to one that you raise.

The problem is, the folk don't always behave themselves and stick to rigid categories. This is something that folklorists and ethnographers of more recent times have wrestled with when dealing with contemporary cultures and people. A story told in one setting may be taken to be true while in another it is taken to be fictional. Similarly, different members of an audience may regard it in different ways. This is the problem that modern scholars need to address when dealing with more recent expressions of folklore.

Given that people in a fairly universal way have told stories and made a distinction separating fiction from narratives to be believed, we can assume that the same distinction existed in ancient - and indeed in prehistoric - times. Indeed, ancient literature emerges full of folklore, but it is not always clear if the stories that are recorded in these early texts were of one or the other species. Certainly, we would expect to see expressions of both genres. It is important to point out that this is not a matter of the dichotomy that distinguishes between skeptics and the faithful. Some stories were certainly told purely for entertainment while others were believed to be true. Of those told as true, some were matter of faith while others were simply expressions of people telling about things that they assume to be true - whether they are or are not.

To determine which texts reflect an actual belief system, we can look to ancient authors, who discuss these stories as matters of belief, even if those authors themselves sometimes give voice to skepticism. After all, if I say that I do not believe in the Resurrection story, there is a built in implication that I had to say that to distinguish myself from those who do believe.

At the same time, archaeological evidence, especially in the form of temples, demonstrate that we are not looking at a body of fictional stories. There may be some level of misunderstanding the texts and what they imply about belief systems as opposed to a celebration of really good stories, but there is enough evidence to gives us good clues that in much of the material, we are looking at stories that were intended to be believed.