James Edgerton threw the home-made device, made from a milk bottle and rags, into the loft at his house in Honeysuckle Avenue, South Shields, last March.
A second "bomb", which had not been ignited, was found at the entrance of the loft shaft.
Newcastle Crown Court heard the couple living at the property next door were horrified when they realised the room directly neighbouring their three
year old's bedroom was ablaze.
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The fire was the climax to a catalogue of torment, which included blaring music and loud noise, the couple had suffered as a result of Edgerton's behaviour since they moved in three months earlier.
The court heard the couple's young child was not at home at the time of the arson attack, but the mum said she was left "living in fear."
Prosecutor Emma Dowling told the court: "She was concerned about what would happened had a neighbour not spotted the smoke and called the fire brigade so promptly.
"She feels she is constantly stressed, not sleeping properly, jumps at noises.
"She feels like she is living in fear."
Immediately after starting the fire, Edgerton, 34, confessed he had thrown the flammable device into the loft because he "heard voices" up there.
Edgerton started the blaze six months after he threw bleach at his own dad in an attack at his home.
He had covered his father's upper body in the corrosive liquid during a confrontation, which left the older man feeling "lucky he wasn't blinded".
The attack happened after a build up of "problematic" behaviour by Edgerton.
Edgerton, of Honeysuckle Avenue, South Shields, admitted arson and having an offensive weapon.
Tom Moran, defending, told the court Edgerton has been diagnosed with schizophrenia.
Mr Moran said a brain injury suffered by Edgerton in 2013 and a history of drug misuse has contributed to his psychotic illness.
Mr Recorder Singh sentenced him to a hospital order with a restriction, which means Edgerton will only be released back onto the streets when he is deemed safe.
The judge told him: "I am satisfied you suffer from schizophrenia, you have a cognitive impairment, exacerbated through traumatic brain injury you suffered
many years ago and your continuing substance misuse."
The judge said Edgerton's condition needs "managing very carefully" to contain the risk he poses.