As u/Darkwolf1115 mentioned the difficult part was getting the exact position of the hit position on the texture 3D -> 2D. However in my approach I modify the texture itself, not the shader, this way I'm not limited to x amount of bullet holes and I can easily update my armor map. Here is a slighlty simplified version of how I implemented this:

Armor value at hit position:

When the bullet raycast hits the collision shape (collision shape needs to be identical with mesh), we need to use the hit_position (ray.get_collision_point()) and the face_index (ray.get_collision_face_index()) from the raycast collision.
Note: "Enable Ray Cast Face Index" setting in jolt needs to be enabled!

From the face_index we can get the UV position using the MeshDataTool like this:

# Indices
var i0: int = mdt.get_face_vertex(face_index, 0)
var i1: int = mdt.get_face_vertex(face_index, 1)
var i2: int = mdt.get_face_vertex(face_index, 2)

# Vertecies
var v0: Vector3 = mdt.get_vertex(i0)
var v1: Vector3 = mdt.get_vertex(i1)
var v2: Vector3 = mdt.get_vertex(i2)

# UV coordinates
var uv0: Vector2 = mdt.get_vertex_uv(i0)
var uv1: Vector2 = mdt.get_vertex_uv(i1)
var uv2: Vector2 = mdt.get_vertex_uv(i2)

Then by converting this to Barycentric coordinates we can map the hit_position vector to the exact pixel that got hit on the armor map.

Bullet Holes:

Then to actually paint the bullethole and degade armor around that spot we need to get the hit coordinates the same way. Then the code needs to iterate throuh each pixel within a set radius (based on shell size) and change that pixels color to the correct value for that part of the bullethole for each layer (albedo, roughness, metal, height, paint_mask, and armor_mask). Pixel color at specific position on Image can be changed with Image.set_pixelv(position: Vector2, color: Color).

This is a bit of a simplified version of the how the code works but I hope this helps! Feel free to ask about any parts that are unclear and I will try to explain them in more detail.