Fire crews from Gainsborough and Saxilby were called to the scene in Stanley Street, Gainsborough, at 11.35pm on Monday, April 19.
There was severe fire damage to 100 per cent of the house and its contents.
Crews put out the blaze using four breathing apparatus, two hose reel jets and two thermal imaging cameras to inspect.
Alison Hedison lives on Stanley Street and saw the fire crews arrive.
Alison said: “I saw a fire engine arrive at around 11.45pm and it was still going on around 1am when I headed to bed but it looked to be more in control with less smoke from my view.
"The firefighters did a good job, especially with getting the engine around these small car packed streets.”
People who lived near the house had to be evacuated from the scene.
Alison said: "I wasn't evacuated as I’m at the other end of the street on the other side.
"I’m not sure how many were but it could have been around five or six on the side that I could see.
"It was very dark and smoky and I was at the other end of the street, I didn’t want to go close and get in their way.
"When walking towards the house this morning if it wasn't for a police car to start with, you would have no idea until you get up close.
"The door has gone and the top window is smashed and inside looked completely black from what I could see.
"It does add to the concern about living in Gainsborough with cars set on fire and smashed up frequently, the street light being switched off at night and you hardly ever see police patrolling."
Lincolnshire Police have launched an investigation.
A spokesman from Lincs Police said: “This was reported to us at 11.40pm last night (Monday, April 19).
"Fire and Rescue were also in attendance and thankfully there were no injuries reported.
"A woman in her 40s was arrested on suspicion of arson with intent to endanger life. She is currently in police custody.
"Investigations are currently ongoing.”