Yes, the core set of people were Catholics (and by this term I include the Orthodox). Luther didn't invent unmerited grace. From the Cathechism of the Catholic Church:
1996 Our justification comes from the grace of God. Grace is favor, the free and undeserved help that God gives us to respond to his call to become children of God, adoptive sons, partakers of the divine nature and of eternal life.
Free and unmerited.
Correct. The Church never taught "unmerited grace." The difference is created and uncreated grace, but that's a whole different topic and has nothing to do with merit.