Don't use the 86 302, it has terrible heads and pistons that won't work with any heads that flow good. The 86 block is stronger than the 85 and older ones, but throw the rest away.
I bought an 86 5.0L for my 84 Mustang (2.3L auto), and it was always way down on power. This winter I am having it rebuilt with new pistons, eagle rods, balanced crank, Trick Flow TW heads, Weiand intake, modified Comp. Cam, forged roller rockers, and all ARP hardware. The only parts being reused from the 86 are the block and crank.
You would be better off finding an 87+ 302 or Explorer 302 with the GT40 heads on it. The 86 heads are the same ones off of the LTD and were only used for the first year of fuel injection.
Don't forget to update the brakes to at least GT front discs, and I am not sure what suspension parts were upgraded on the 289 cars vs the I6 ones. The Lincoln Versail 9" rear axle with rear discs is also a good upgrade. If you want to be uber pimp, install a set of 94+ Cobra front brakes on the car along with a set of SN95 rear brakes and run a set of modern wheels. Early Mustangs look very nice with modern rollers. Check out Ford Racing's Project Cammer 66 2+2 SEMA car.
Good luck with your swap!