Officers believe a device exploded under the vehicle in the Manor View Park area of Letterkenny.
Army Technical Officers from Athlone have been called to the scene to check the vehicle and look for possible secondary devices.
Garda Detective Inspector Pat O'Donnell said: "A number of homes have been evacuated.
"I can confirm there was an explosion underneath a vehicle and the scene has been preserved.
"We have asked for the assistance of the ATO to check the area in case there are secondary devices."
It is unclear what the motive for the incident was, however it is not thought to be linked to dissident terrorists activities.
DI O'Donnell said officers would carry out door to door inquiries later once the scene has been cleared.
"We know there are CCTV cameras in the area and we will examine footage from those," he added.
Anyone with information on the incident is asked to call detectives at Letterkenny on 07491 67100.