With the double wound lock washer and fiber washer installed between the bell housing and transom plate the alignment tool hits about 1/4” low on the coupler. If I remove the felt washer and double wound lock washer it align much better. What would cause the engine to sit too high at the transom plate?

I had everything apart for transom repair so anything is possible.

When I took it apart I do not remember a double wound washer or felt washer. I bought those parts based on the parts diagram as I was putting it back together.

Later models no longer use spring washer . Good luck.

Did Mercury change the bell housing when they did away with the washer?

It’s possible that the bell housing is not the original since I bought this boat used.

They changed the bushing. If the bushing has large serrations on the bottom it’s the new style

It has to do with the bushings that are pressed into the bell housing, as stated above the later ones don't use the spring

I do lots of engine r&r. Just a tip remove the gimble bearing its easier to see which way to go. When you put bearing back in do a final check. If you put new rear mounts in i find they settle lower after a few days. Hope this was helpful

I pulled out the double wound lock washer and fiber spacer and the drive lines up. What hardware do I use to bolt it down? Do I use the same bolt, spacer and washer on top of the flywheel housing?

Here is a picture of the alignment before removing the lock washer and fiber washer. The back of the engine was sitting too high.

Rotate engine-if alignment changes-bad coupler
Does the block have dowel pins in it?
The gimble bearing will rock in transom assembly. Have you smacked it up, down and sideways?

I didn’t realized the gimble bearing could shift. I will check the items that you suggested and report back. I can lift the engine completely out this weekend and remove the flywheel cover. Should I have dowels in the back of the block? The flywheel housing has the holes to accommodate them.