Is the funeral prayer held in the mosque?

It depends: the funeral prayer (salat al-janazah) can be held in the mosque, and in the West it usually is, but it can also be prayed outside. The Prophet ﷺ normally prayed it in an open prayer area, yet he also prayed it inside his mosque. Scholars differ on which is better.
What the Prophet ﷺ did
In Madinah there was an open prayer ground next to the mosque where funeral prayers were usually held. But the Prophet ﷺ also prayed over a Companion inside the mosque. When Sa'd ibn Abi Waqqas died, Aisha asked for his body to be brought into the mosque so she could pray over him. Some people objected, and she replied that the Prophet ﷺ had prayed over Suhail ibn Bayda inside the mosque (Sahih Muslim 973). So praying janazah in the mosque has a clear precedent.
How the schools differ
- Shafi'i and Hanbali: praying the funeral prayer in the mosque is allowed without dislike, based on the hadith above.
- Hanafi and Maliki: it is disliked to bring the body into the prayer hall, mainly to protect the mosque. Many Hanafi mosques place the coffin in a courtyard, side room or doorway while people pray inside.
Both views are respected. Follow the arrangement of the mosque you're at.
How it usually works in the UK, Europe and the USA
Most communities hold the janazah straight after one of the daily prayers, often Dhuhr or Jumu'ah, so many people can join. The imam announces it, the coffin is placed in front (or in a side area), and everyone stands in rows. The prayer itself is short: four takbirs, Surah al-Fatiha, blessings on the Prophet ﷺ, a dua for the deceased, then salam to the right. There's no bowing or prostration. Then people go to the cemetery for the burial. Some cemeteries and funeral homes also have their own prayer halls.
The reward of attending
The Prophet ﷺ said that whoever attends a funeral until the prayer is done gets one qirat of reward, and whoever stays until the burial gets two, each like a huge mountain (Sahih al-Bukhari 1325). When you hear of a death, Muslims say:
You don't need to know the deceased to join; praying for a stranger is a beautiful act. For a non-Muslim relative, the rules are different. See Can I attend my non-Muslim grandma's funeral as a Muslim? And for what Muslims believe comes next, see What do Muslims believe happens after death?
- The funeral prayer may be held in the mosque or outside.
- The Prophet ﷺ prayed over Suhail ibn Bayda in the mosque (Sahih Muslim 973).
- Hanafis and Malikis prefer the body outside the prayer hall.
- Attending brings great reward, even for a stranger.
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