... Thus whenever Paul writes to Christians, he calls them saints, sons and heirs of God, etc. Therefore saints are all those who believe in Christ, whether men or women, whether slaves or free. And they are saints, on the basis, not of their own works but of the works of God, which they accept by faith, such as the Word, the sacraments, the suffering, death, resurrection, and victory of Christ, the sending of the Holy Spirit, etc. In other words, they are saints, not by active holiness but by passive holiness.

Such genuine saints include ministers of the Word, political magistrates, parents, children, masters, servants, etc., if they, first of all, declare that Christ is their wisdom, righteousness, sanctification, and redemption (1 Cor. 1:30), and if, in the second place, they all do their duty in their callings on the basis of the command of the Word of God, abstaining from the desires and vices of the flesh for the sake of Christ. They are not all of equal firmness of character, and many weaknesses and offenses are discernible in every one of them; it is also true that many of them fall into sin. But this does not hinder their holiness at all, so long as they sin out of weakness, not out of deliberate wickedness. For, as I have already said several times, the godly are conscious of the desires of the flesh; but they resist them and do not gratify them. When they fall into sin unexpectedly, they obtain forgiveness, if by faith they return to Christ, who does not want us to chase away the lost sheep but to look for it. On no account, therefore, am I to jump to the conclusion that those who are weak in faith or morals are unholy, when I see that they love and revere the Word, receive the Lord's Supper, etc.; for God has received them and regards them as righteous through the forgiveness of sins. It is before Him that they stand or fall (Rom. 14:4).

Luther's 1535 Galatians Commentary

LW, AE vol. 27, p. 82

... Yet God does not impute this sin, for He is gracious for the sake of Christ. It does not follow from this, however, that you should minimize sin or think of it as something trivial because God does not impute it. It is true that He does not impute it, but to whom and on what account? Not to the hardhearted and smug but to those who repent and who by faith take hold of Christ the Propitiator, on whose account sins are forgiven them and the remnants of sin are not imputed to them. Such people do not minimize sin; they emphasize it, because they know that it cannot be washed away by any satisfactions, works, or righteousness, but only by the death of Christ. Yet they do not despair because of its size but are persuaded that it is forgiven on account of Christ.

I say this to keep anyone from supposing that once faith has been accepted, sin should not be emphasized. Sin is really sin, regardless of whether you commit it before or after you have come to know Christ. And God hates the sin; in fact, so far as the substance of the deed is concerned, every sin is mortal. It is not mortal for the believer; but this is on account of Christ the Propitiator, who expiated it by His death. As for the person who does not believe in Christ, not only are all his sins mortal, but even his good works are sins, in accordance with the statement (Rom. 14:23): "Whatever does not proceed from faith is sin." ...

Luther's Lectures on Galatians, 1535

Quoted from Luther's Works, American Edition, vol. 27, p. 75-76