Is this "imputed righteousness" --God overlooking our sins? (I'm not sure exactly what you mean by "favor" here.)
Catholics believe that God makes us truly holy by giving us His own life in our souls. We are made holy by His grace, or the indwelling of the Holy Spirit.
When we say we are saved by grace, we mean that salvation is an unearned gift to believers. Ephesians 2:8 For by grace you have been saved through faith. And this is not your own doing; it is the gift of God,
Catholics agree that we are saved by grace. We believe that our salvation is a gift from God. Neither do we believe that we can earn our salvation. But this does not mean that our works are not tied to our salvation. Faith and works are two sides of the same coin. "Faith without works is dead." James 2:14-19
Just seeing this exchange. I would say that, yes, grace IS imputed and means both that God does not count our sins against us when we receive Christ and that he imputes the righteousness of Christ to our account.
Psalm 32:2
Blessed is the man unto whom the LORD imputeth not iniquity, and in whose spirit there is no guile.
Romans 4:6,8
Even as David also describeth the blessedness of the man, unto whom God imputeth righteousness without works. Blessed is the man to whom the Lord will not impute sin.
James 2:23
And the scripture was fulfilled which saith, Abraham believed God, and it was imputed unto him for righteousness: and he was called the Friend of God.
Romans 4:20-25
He (Abraham) staggered not at the promise of God through unbelief; but was strong in faith, giving glory to God; And being fully persuaded that, what he had promised, he was able also to perform. And therefore it was imputed to him for righteousness. Now it was not written for his sake alone, that it was imputed to him; But for us also, to whom it shall be imputed, if we believe on him that raised up Jesus our Lord from the dead; Who was delivered for our offences, and was raised again for our justification.
The way I see it, grace is referring to imputed righteousness but the plain meaning of the word grace is just the unearned favor of God.
If you replace "grace" with "mercy" the verse's meaning would be changed a bit but the statement would still be true in my opinion.
8 For by grace mercy you have been saved through faith; and that not of yourselves, it is the gift of God;
Now if you are like me and you read the above verse with mercy instead of grace, you would understand that mercy isn't a spiritual substance or even the Holy Spirit, it is just "mercy" but it is referring to everything that God has done and does for us so that we can be saved. That includes the death and resurrection of Jesus and God imputing His righteousness to us. This is how I understand grace.
It seems that Catholics make grace into some sort of spiritual substance or the Holy Spirit.
Sorry for the late response.