Good historical fiction requires that the author is 100% true to the time period in terms of accuracy in historical fact. Books that take their inspiration from history, but weave in details that they invent are often in the fantasy genre, like medieval fantasies. My favorite book in that genre is Guy Gavriel Kay’s novel, The Lions of Al-Rassan. http://www.brightweavings.com/books/index.htm
When I wrote Adeline’s Dream I based it completely on actual events that happened in the town of Qu’Appelle, Saskatchewan in 1910. All of the happenings are even true, like the summer theater put on by local actors and actresses, although that’s only because I had our local history book, Footprints to Progress, to draw from for these details. However, with other historical novels I’ve had to create fictional communities based on research of the time period, which is another way to have a strong setting and weave in details to bring stories to life for readers.
It’s always difficult to decide whether to use actual historical figures in a novel. Generally, if they are real players in the time being developed, then they must be used. Lots of historical novels focus on turning points in history, like the Civil War or the Depression of the 1930s, so in order to be historically accurate, real people are woven into the story to create the setting. Characters may listen to speeches (based on real ones) or hear radio broadcasts (based on news of the era) to bring these characters to life with historical detail.
In Adeline’s Dream I used the names of many local people from the history book, such as Reverend Maillard, who really did paint the murals of the Last Supper in the Catholic Church. However, I made up the names of the people in the Grand Concert, because I wanted to make some of my fictional characters be key players in this important part of the plot.