Connie, In this economy you are very prudent to be conerned about the owner defaulting on the property you are buying. I had a tragic phone call a few months ago from someone who had put down $18K and had made large monthly payments in excess of the seller's monthly mortgage, only to find that they were served papers on an impending auction on the property. All 9 months that they had been paying the seller WASN'T!!! Imagine.
My suggestion is that everything be spelled out very clearly in your initial agreement, just as Dot said. I would have a Realtor or attorney protect you in this. Have an escrow opened, with the deposit and any monthly amount that is targeted toward the purchase to go into the escrow account. Not only will you know that your money is protected, it will also help you when you are ready to complete the purchase. It will show the lender your track record of making payments.
In addition, I would suggest that you formulate (and contracturally document) that you have a proof of payment to the mortgage lender each month- whether the seller faxes you confirmation of receipt of payment, allows you to view the lender's payment website, or whatever- you need to know that the monthly payments (and taxes) are current.
Lastly, if you are going to be making improvements to the property during the lease option time period I would protect yourself there somehow also, in your contract.
Last, some lease options file a lien against the deed for the amount of the deposit, until the lease option is excersized. This is a bit more difficult to get the seller to agree to, because if you were to default on your portion, they have the lien, so they may not go for it.
Protect yourself- and the seller, in every step of the transaction!