The Newcastle Muslim Association said it has found a site at Buchanan for a new place of worship and a small funeral home.
The rural site is just off the Hunter Expressway on Buchanan Road, and the association said it has begun discussing the plans with nearby landowners.
Association spokeswoman Diana Rah said the new mosque will house 200 worshippers on a Friday, as well as two festivals each year.
She said the proposed building does not look like a typical mosque.
"The design that we've proposed is to blend in with its surrounds, and we're not having any minarets or domes," she said.
"It's unusual but it's not unknown - there are many mosques without minarets in Australia.
"We're hoping it's not going to have any impact on the surrounding location, that it will fit in, sits nicely with the environment."
The association said the new mosque is needed because it is struggling to accommodate worshippers at its Wallsend mosque during Friday prayers.
A proposal for a $7 million mosque at Elermore Vale was rejected nearly four years ago.
Association spokeswoman Diana Rah said the new mosque is smaller.
"We had explored many sites before we came to this one," she said.
"This one seems to tick all the boxes - it's the right zoning, we're hoping there won't be any issues with traffic, it's not in an urban area.
"We've tried to listen to our lesson that we've learned at Elermore Vale, and look for a place that won't have any impact on its surrounds."
She said the association is keen to consult the community at every stage.