My son and I live with my sister, her husband and their daughter. And at one time, we had our other sister and her son living here too. Seven in a 3 bedroom house... Talk about crowded.
First of all, two words: FAMILY MEETING!
Before you have your family meeting, make some notes as to what you love about her. That way, you're not as angry when you make your list of topics to discuss.
Let her know that.... tomorrow night, we are having a family meeting at 9pm in the living room. That way the kids are probably in bed and that you three can sit down and everyone can be prepared or at least be ready to listen or talk about the things that are bothering each of you.
Sure, you probably won't want her to feel as though you two are ganging up on her, but you have valid concerns.
When your meeting gets ready to start, everyone must agree that there won't be any screaming or yelling, or storming out of the room. Adults can sit down, talk about it, even if someone's feelings get hurt, you still have to talk about some ideas that can help the family situation be less stressful for all of you.
Secondly, make time for family time. You and your husband and child, go do something, even if it's to go to the park, something cheap, something relaxing. Take in a movie if you want, just get out of the house for a little bit. She also needs to make time for her. Does she ever get out, without her children?
We take time outs. I go to my room. But when I start getting mad about those little things that bother me, I stop and try to remember, this is only for a season.
It won't last forever. And, you're family.
I wish you tons of luck. The best way to fix a problem is to address it, make a plan, and stick to it.
Load of hugs from someone not too far from what your situation is.