ltwin the Pentecostal’s response was very good. He get’s very close.
ltwin;8675921:
You are regenerated (spiritually alive) and justified (declared righteous in the eyes of God) the moment you have faith and repent. You are also sanctified in a sense at this moment.
Replace the word declared with the word made, and you have the Catholic teaching.
Justification entails the removal of guilt and punishment for sin and also the restoration to God’s favor. Justification is not a process. The “babe in Christ” is just as justified as the believer of 50 years.
Catohlics agree.
Justification “reckons” to the sinner the righteousness of Christ, so that God sees the sinner through the perfect righteousness of His Son.
Here we have a problem, but Itwin later corrects it, or contradicts it. The Catholic position is that God does not call what is reprehensible good. Rather, He transforms us, makes us new. He does not let us sit in filthy diapers. He gives us a bath, but the bath is given to the soul and the solvent that washes away the sin is the blood of Christ.
Yes, God does transform us, but this happens in Sanctification. Where Christ’s holiness becomes a part of our inner nature.
**The initial act of sanctification **
is positional; the moment a person is regenerated he is sanctified.
We agree. It happens in baptism.
The holiness of Jesus is imputed to the believer much like the righteousness of Jesus is imputed to the believer in justification.
Here there is a problem as you point out. God does not simply call evil good. He does not impute righteousness to the unrightous. He transforms the unrightous. It is impossible for someone who is untransformed, who has not experienced holiness to get this. That person has faith, truly believes, but is impenitent. So using Luther’s sola fide faces his own sinfulness and says, I am still a sinner, but I am saved, justified. It is ok that I am still sinful, because I have faith and that makes me acceptable to God, even though I still am in my sin. Believing this is believing it is impossible to get victory over sin by grace. It is believing a deadly lie.
I don’t know about what Luther believed

. I only know what my own faith tradition teaches. Faith and repentance go hand in had. They are two sides of the same coin.
Then there is the continuing process of sanctification
, where the imputed holiness progressively becomes a practical part of the daily Christian life. We grow in grace.
We indeed grow in grace. The transormation continues and souls grow in holiness, become ever holier, but the holiness is not imputed, or as you say, God is a liar. God does not call straw gold, or dung snow. The righteousness of Christ becomes ours, because we genuinely become like Him, through the process of sanctification by growing or increasing in grace. The justification takes place initially as Itwin says.
Initial sanctification can be said to be imputed. However, process sanctification is very much an infusion of Christ’s holiness in our lives. We are dead to sin; our old self was crucified with Him. Now remains Paul’s admonition in Romans:
12Let not sin therefore reign in your mortal body, to make you obey its passions. 13 Do not present your members to sin as instruments for unrighteousness, but present yourselves to God as those who have been brought from death to life, and your members to God as instruments for righteousness. 14For sin will have no dominion over you, since you are not under law but under grace.
Then there is complete and final sanctification at the coming of Jesus
. Therefore, we have been saved from the penalty of sin; we are being saved from the power of sin; and we shall yet be saved from the presence of sin.
Itwin is right. There is a great permanent gulf between Lazarus in the Bosom of Abraham and the palce where the rich man called out for a drop of water. Catholics would say the rich man appears to be in purgatory. He called out to God for relief. He had hope that his suffering would be relieved. In hell there is no hope. The rich man also willed the good of his brothers still alive on earth. Souls in hell do not will the good of others. They hate everyone. There is no desire of anyone else’s good, communion of saints.
All of this comes through faith and repentance and continues only in a life of faith and repentance.
But the Protesstant position articulated by Luther says it comes by faith alone, faith and nothing more.
I would think the Lutheran position of sola fide does not imply that repentance is not necessary. Nevertheless, if Luther did indeed think that then that is something Pentecostals disagree with him own.