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Two things should be distinguished:
The second belief is widely contested in Islam and always has been; the first is not.
Note: in casual speech nowadays people sometimes use 'literally' to mean 'very much' or just 'true'. But in this issue, 'literally' refers strictly to the way words are interpreted. Those who say not all of the Qur'an is meant to be understood 'literally' are not saying that it is not true or not to be taken with the utmost seriousness.
In classical Islamic scholarship this issue of what words or phrases in the Qur'an mean is seen sharply in the verses which use words of God that apply to human beings (anthropomorphism). For example, twelve times in the Qur'an there is a reference to the 'face of God', as well as references to the hand of God, or to God as 'seeing' or 'hearing'. With human beings this refers to parts of the body; but what about God who cannot and must not be likened to a human being?
In Islamic history there are some classical positions on this issue:
1. The anthropomorphists who insist on a literal meaning to God's face, etc.
2. The theologians known as the Mu'tazila who say that such passages cannot be taken literally for God cannot be likened to a human being and does not have a body. 'There is nothing like Him' (Qur'an 42:11).
Such passages referring to God's face much be understood as poetic ways to talk about God's presence, God's hand means God's action or power, God seeing or hearing can refer to God's knowledge of everything. References to God as 'basir' (All-Seeing) or 'sami' (All-Hearing) are names of God like Al-Rahman.
3. The Ash'arite theologians take a middle path. They say these words do apply to God strictly - God has a face - but in a manner different from humans, and we don't know what that is like. As Al-Ash'ari says, 'We say nothing on the subject except what God Almighty said and what the Prophet (pbuh) said. Thus we say: He does have a face, without specifying how.'
There are two classical Shi'a traditions which differ on the question of literalism and interpretation.
1. The Akhbari school emphasised the literal understanding of the Qur'an and the Hadith, and limited the use of reason, interpretation and ijtihad. The role of the scholar was not to develop new thinking and legal interpretations, but to master and review the sources and traditions.
2. In contrast, the Usuli school emphasised the role of reason, interpretation and ijtihad by those who are qualified. Those not qualified to exercise ijtihad themselves were encouraged to follow the example of an eminent scholar or marja al-taqlid.
A further question has arisen in modern times. How do we understand the Qur'an in the horizon of today and in relation to the scholarship of the past?
Once again, there are different kinds of response. Sometimes these are explicit stances associated with a tradition or madhab. Other times it is more like a 'trend' or a 'tendency'.
Many Muslims see a very limited role for reason or interpretation of the Qur'an; they might even say 'none'. They feel that matters of belief and practice are clearly laid down and there is no need for 'rereading' in the context of today. Many who take this approach prefer to understand the Qur'an in literal ways.
Others want to read the Qur'an in two contexts: in the time of the Prophet (pbuh) and his Companions and in the horizon of today. For them the original intentions expressed in the Qur'an need to be interpreted and expressed anew in every time and place in ways that are directly relevant to the times. For them interpretation or ijtihad is a constant necessity to continue to manifest God's will on earth in our time.
For certain spiritual or mystical approaches, such as Sufi traditions, neither literalism nor the use of reason reveals the full meaning of the Qur'an. The Qur'an has deeper meanings, sometimes layers of meaning, which are not available on a casual or superficial reading of the Text but are only revealed with deep meditation and reflection.