On the question of presenting horror in D&D -
The basic feeling of horror is a sense of powerlessness, which is hard to convey in the mechanisms of play without just completely overwhelming the players and killing them, thus sapping the fun of the whole game.
But I wonder if you can convey "fear" in the game better by presenting challenging obstacles that don't simply punish the players with death. Instead, force them to suffer change in failure - not necessarily detrimental mechanical handicaps like losing an arm, but things that simply change how their characters work on some fundamental level to keep them both intrigued and concerned. Like a reversal of traditional secondary progression (loot and magic items) that close and open different doors of playstyle.
An example for their current circumstance: if a character "engages" with the mushroom god in any way, specifically with hostility, then that character may suffer some fungal curse that saps some of their max HP permanently, but gives them some weird ability (spore cloud stuff maybe). Basically Annepire. After all, the people of the ancient world take refuge in ignorance and fear the turbulent winds of change caused in the wake of restless gods and powers.