The three-story townhouse in Truganina in Melbourne's west went up in flames about 2.30am on Thursday.
A 28-year-old woman inside called emergency services to raise the alarm, however she did not survive.
Victoria Police said it's believed two people were seen getting out of a dark coloured car parked outside the address just before the fire and fled after a significant explosion at the property.
"Detectives are treating the fire as a targeted attack, however police have not been able to establish any reason why the woman or her family would be targeted in this way," the force said in a statement.
"Investigators are looking to see who may live in the area of the fire and the potential for this to have been a case of mistaken identity."
Detective Inspector Chris Murray said the woman was house sitting for her brother while he was on his honeymoon and described her as "the kind of girl who doesn't leave home very much".
"She's been subjected to the most appalling, despicable act one could imagine," he said.
The Arson and Explosives Squad detective inspector said police were investigating it as a homicide.
"Whether they meant to damage these premises or just cause a scare tactic, now they are staring at a charge of homicide, of murder," he said.
"One innocent young lady has lost her life, which is nothing short of a tragedy."
Police believe the two people who fled were male but do not have any other information about them, including whether they were injured in the attack.
"If someone's seen someone come home who has had a burn, that's something we'd like to hear about again," the detective inspector added.
Firefighters arrived at the blaze within six minutes of being called and the house was already well alight, with a neighbouring property evacuated as a precaution.
Investigators are combing the area for CCTV and anyone with other footage has been urged to come forward immediately.
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