A couple inches below the waterline shouldn't hurt. It wouldn't be any worst then a wetlift.
Although, there should be a loop in your exhaust about 18" above the waterline before it exits the vessel. But then you then you would have go with a wetlift just to catch the returning water after a shut down.
Maybe a flapper on your exhaust port, like on powerboats, would be the best solution.
If the boat is heeling with the motor
running, water will not enter.
Marine Hardware - 316 SS Generator Exhaust Ports